(MONEY Magazine) – The hottest IPO of 2003 hailed not from Silicon Valley but from Shanghai. A frenzy over Chinese online travel firm Ctrip.com boosted its shares 89% above their $18 offering price on its first trading day. It's not just IPOs: All things Chinese are red hot. Record economic growth--9.1% last year--and the transformation to a market economy have many swooning over the prospects for riches. "China is like America during the 1800s and 1900s, but on speed," exclaims Prudential chief strategist Ed Yardeni. China is no place for most individual investors; it remains fraught with political uncertainties and prone to busts as well as booms. But China has become an economic force too powerful to ignore. Even those who keep all of their money in S&P 500 stocks should know how China affects American business. China is...

...a market

China's population is now 1.3 billion, and it's rapidly urbanizing. That means the country must build the equivalent of a Houston a month to keep up, Yardeni says. So China is soaking up the world's supply of metals, oil and cement. Result: soaring global commodity prices. China's rising standard of living is also creating a huge demand for consumer goods. "The goal, as China gains wealth, is to make sure we're getting a significant chunk of their demand," says Matthews Asian Funds manager Mark Headley. U.S. exports to China have nearly doubled since 2000.

WHAT THIS MEANS FOR INVESTORS

This is good news for Boeing, Caterpillar, Motorola and others who sell the gear China needs to build its infrastructure. It's also an opportunity for consumer giants like Nike. Commodity stocks will stay hot.

...a factory

The average Shanghai factory worker makes the equivalent of $207 a month. Cheap labor equals cheap imports, and American companies haven't been able to resist. Wal-Mart, for example, is expected to nearly double its purchases of Chinese goods to as much as $30 billion within five years, according to Deloitte Touche Tohmatsu. This is tough on U.S. factory workers--if they still have a job, they're in no position to demand big wage hikes. At the same time, cheap T-shirts and DVD players are crowding U.S. store shelves. It all adds up to low inflation.

WHAT THIS MEANS FOR INVESTORS

China's moderating effect on inflation is swell for bond investors, who thrive on low interest rates. (Low prices are great for Wal-Mart too.) But our addiction to imports has put dollars into Chinese hands, and they've invested many of them in Treasuries. If China stops buying, bonds are in trouble.

...a bubble?

Is China too hot? Reports of commodity shortages and power outages have economists worried that China's growth could burn out. The fear: that the flood of money into China has led to overbuilding and overinvestment in speculative projects. Also, years of lending to money-losing state-owned firms has weakened Chinese banks. If this investment boom isn't reined in, demand may not keep up with supply, leading to empty factories and depressed property values, or even to a banking crisis. The Chinese government is trying to cool things down; for a start, it's reducing tax incentives on exports.

WHAT THIS MEANS FOR INVESTORS

If the bubble bursts and China can no longer afford imports from its Asian neighbors, the whole region could take a dive, with a ripple effect on U.S. growth. A third of our total exports go to Asia. --LISA GIBBS