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Hedge funds are trying to capitalize on China’s insatiable appetite for fuel.

RAPID ECONOMIC GROWTH has made China the world's second-largest consumer of fuel -- behind only the U.S. -- a trend that has not gone unnoticed by hedge funds. And with demand only expected to increase, fund managers have been aggressively taking positions in China's energy market.

"If you can speak Chinese and you know about commodities, you are going to be one of the most successful people in the world in the next 20 to 30 years," says James Rogers, who created the Rogers international commodities index and earlier co-founded the famed Quantum Fund with George Soros in 1970. Rogers, who currently serves as a guest professor of finance at Columbia University in New York, is so optimistic about the long-term prospects of Chinese energy holdings that he has put his Manhattan town house up for sale and plans to permanently relocate to China.

Last year energy usage rose 8 percent in China, according to the BP Statistical Review of World Energy 2007. With the country's urban population continuing to grow, demand is likely to increase, making energy companies, such as China National Offshore Oil Corp., incredibly attractive investments. With a large cash position and negligible debt, CNOOC, like many Chinese utilities, boasts a price-earnings ratio of less than 10 and a 3.7 percent dividend yield. "China has an unquenchable thirst for energy, and CNOOC is busy supplying it," says economist Mark Skousen, who teaches finance courses at Columbia.

One of the biggest investors in CNOOC is East Setauket, New York­based hedge fund firm Renaissance Technologies. Another investor that has been taking large positions in China's energy market is Chicago-based Citadel Investment Group, which recently invested $28 million in convertible bonds issued by Beijing's China Shen Zhou Mining & Resources.

The downside of China's conspicuous fuel consumption is an environmental crisis of alarming proportions. Sixteen of the 20 most polluted cities in the world are in China, according to the World Bank -- the result of underregulated industrial activity and low automobile emissions standards. But with the 2008 Summer Olympics in Beijing just around the corner, China has pledged to clean up its act.

The country's increased emphasis on renewable energy programs, including its goal of supplying 15 percent of all its power through alternative means by 2020, represents yet another potentially significant play for hedge funds. The Kyoto Protocol's Clean Development Mechanism allows emerging countries like China to sell certified emission reductions as credits to Western investors to aid with funding for an array of environmental projects. "CERs are attracting foreign investment, bringing the country new technologies and gifting the Chinese government with billions of dollars to try to reduce their air pollution," says James Finch, an independent commodities trader.

Natural gas is a key component of China's antipollution effort and has attracted the likes of billionaire energy investor T. Boone Pickens Jr., who with Andrew Littlefair co-founded Clean Energy Fuels Corp. The company, which provides fuel for natural-gas vehicles, went public in late May. Pickens and Littlefair, Clean Energy's president and CEO, recently visited China to try and establish a chain of retail natural-gas fueling stations to support the country's growing number of natural-gas-powered vehicles.

Still, not everyone is gung ho on China. "It takes seven to ten years to bring in a new oil field," notes Jeffrey Currie, head of commodities research at Goldman, Sachs & Co. "The ones that are currently in production won't be up and running until the next decade, during which time supplies may remain tight." There is also the issue of access. Though regulators have shown some signs they might ease current restrictions, hedge funds with less than $5 billion in assets are currently prohibited from trading on China's mainland exchanges.

Despite such obstacles, industry observers such as Peter Fusaro, co-founder of online research and consulting firm Energy Hedge Fund Center, believe China's rising demand for energy is appealing enough that hedge funds will continue to pour into the sector. "The bottom line is that we are in the middle of a demand-driven bull market in energy commodities like we have never seen before and probably won't see again," says Fusaro.

Investor James Rogers is making a move into China's energy market.