By: Jim Trippon, Editor-in-Chief, The China Stock Digest, Special Contributor to Wealth Management Exchange

(First of Two Articles)

China shook up the financial universe over the past twelve months. The New Year promises even more of the same.

Because there is so much confusion and misinformation in the mainstream financial media about China, research by specialists about investing in Chinese stocks and ADRs is essential. One of the most important stories to have dominated the media illustrate just how far off base the sensation-grabbing mainstream financial media can be.

Are Chinese Firms the Largest in the World?

Recent headlines announced to the World that Chinese companies have, for the first time, surpassed the United States in the top ten rankings of global corporations. Five of the world's biggest companies, as measured by market capitalization, are Chinese compared to only three in the United States.

China's big five are: China Life (LFC), PetroChina (PTR), China Mobile (CHL), Industrial and Commercial Bank of China (ICBC), and China Petroleum and Chemical (Sinopec) (SNP). The three US firms still in the top ten by market cap are ExxonMobil, General Electric and Microsoft. Royal Dutch Shell of the Netherlands and Russia's Gazprom round out the list. (Note: Industrial and Commercial Bank is not listed in the U.S.)

One trigger for China's new status in the top ten list was an eye-popping earnings report by China Life. For the third quarter of 2007 the Chinese insurance giant announced profits of more than $1 billion. With that announcement, China Life pushed AT&T out of the top ten.

The second major event that put Chinese stocks on the list was the initial public offering of PetroChina on the Shanghai Stock Exchange. The IPO was hugely oversubscribed, and share prices more than tripled in Shanghai after the company's $8.9 billion debut on the mainland China exchange. At that moment history was made, and multiple world records were set.

PetroChina's $1 Trillion Capitalization: Is It For Real?

With a reported $1 trillion in market capitalization, PetroChina surpassed ExxonMobil and was labeled the biggest company in the world. No company has ever before passed the trillion-dollar mark in market capitalization. By contrast, ExxonMobil is valued at less than $500 billion.

PetroChina's IPO also raised the most money of any new listing this passed year. However, PetroChina's new high profile immediately drew fire from critics and not without reason. PetroChina's earnings for the first half of the year, just under $11 billion, are little more than half of ExxonMobil's $19.54 billion profit. Corporate production figures are equally confounding. PetroChina produced 2.9 million barrels of oil equivalent daily last year. By comparison, ExxonMobil delivered 4.2 million barrels per day.

Skeptical market commentators are suggesting that PetroChina is hugely overpriced. It might seem that way, but the $1 trillion market cap of PetroChina is more of a headline writer's attention-grabbing gimmick than an economic reality. PetroChina's seemingly fabulous market capitalization was based on the price of shares in Shanghai, even though the Shanghai IPO represented only 2% of the company's total outstanding shares.

Who's Calculating the Firm's Value?

Prices on the Shanghai Exchange are much higher than prices for shares of the same company on other bourses. If PetroChina's value had been calculated according to the price of the company's H shares, which are traded in Hong Kong or its ADRs, traded in New York, the firm would have been valued much more modestly at approximately $400 billion.

If you think that still seems like too high a corporate valuation compared to ExxonMobil, keep in mind that roughly 86% of PetroChina's shares are held by the Chinese government and are considered essentially non-tradable. The Chinese government is very serious about maintaining an overwhelming majority stake in strategically important companies. Although the government's shares in PetroChina and the other top ten companies are as real as any other financial instrument, their value is debatable. If they can never be traded, what is their real cash value?

Investing in China? Watch for Those Exaggerated Claims

Here's a brief summary of what this historic period has demonstrated once again for investors in Chinese companies:

* It's important not to get carried away by headlines touting the success of any Chinese corporation. The structure and behavior of China's stock markets is different from that of exchanges anywhere else in the world. Zooming values on the Shanghai and Shenzhen stock exchanges do not usually translate to markets elsewhere.

* The structure of China's so-called "national champion" mega-corporations is different from corporate structures we are used to in America. The "national champions" are critically important companies which are majority-owned by the state. Despite the transition from communism to increasingly unfettered capitalism, China will not relinquish ownership of these companies in the foreseeable future.

* As long as China's internal markets remain largely inaccessible to foreigners, those exchanges will continue to behave erratically by western standards. Scare stories about a valuation "bubble" in Chinese stock prices usually make no distinction between extravagant valuations on China's mainland exchanges and the more reasonable prices for the very same Chinese companies traded in Hong Kong and New York.

* Even if there still is an internal stock market bubble after a recent slump on the Shanghai and Shenzhen exchanges, further declines on the mainland won't necessarily affect valuations of companies overseas. That's because shares cannot be arbitraged between mainland stock exchanges and those abroad.

Finally, don't be alarmed by constant warnings of a bubble on China's markets. And, take those ominous headlines about "super massive" Chinese companies with a large grain of salt.