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Trading China: The Risks

Earlier this year, China's stock market plunged 9%. The next day, the Dow dropped 400 points. This begs the question, has our link to this volatile and communist nation grown too close? What if their overheating economy spreads inflation to the rest of the world? What if their exports such as pet food continue to be plagued with quality issues?

Here's how to manage these risks and still profit from the growth story that is too great to ignore.

Jeff Macke explains it will be important for China’s trading partners such as the US to demand higher standards. And Jeff expects to see more hiccups such as the recent pet food scare. However, Jeff adds all things remaining equal, it’s very possible China will surpass the US as the world’s next super-power.

Chinese Stock Risks

Sybase (SY) CEO John Chen joins the guys for this conversation. His company provides software and services that deliver information to mobile devices such as your BlackBerry.

Will China surpass the US and become the world’s next super-power?

“Nobody could predict that,” Chen says. “If we don’t become more competitive then, (yes) we will lose our position.”

What does the US dominate now, other than financial services?

“Creativity and inventions,” says Chen. “We do well in creating and that (translates) to film and media and pharmaceuticals and the like.”

Is it possible to hold the Chinese to higher quality standards?

“Absolutely,” says Chen. China understands the standards, they just can’t regulate them well and that presents opportunities and risks. “Opportunity because we can help China regulate better and risk because they (might) do better than we could.

How do Americans compete when American business thinks in quarters and Chinese business thinks bigger picture?

“If I could answer that, I’d write a book,” says Chen. He also says the US need to be permitted to own part of the Chinese market as they can own portions of ours.

Would the Chinese receive that idea?

“We’ve got a lot of work to do…  In software (Chen’s field) they have developed a little bias for their own,” replies Chen.

Do we have more leverage because of the Beijing Olympics?

“Yes and we’re losing valuable time,” Chen says. “(Because) over time we will lose leverage (to Europe.) “Although I’m not sure the Olympics will be the tipping point.”

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Trader disclosure: On May 22, 2007, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders: Macke Owns (SWY); Najarian Owns (MDT), (STI); Bollings Owns Coffee, Sugar, Gold, Silver; Bolling Owns March Natural Gas Futures and Is Short April natural Gas Futures