China has the world's largest commercial bank, its biggest aluminum maker, its No. 2 oil firm and its fourth-largest investment bank. It has five of the world's 10 biggest companies, versus three for the United States.

Never mind that outside their home markets, the companies' business operations are dwarfed in size and sophistication by Western and Japanese giants.

Soaring prices on the Shanghai Stock Exchange have propelled listed Chinese firms' capitalizations -- including shares held by government and institutional investors that have not yet become freely traded -- to the top of global tables.

For some investors, particularly foreigners, that's a sign Chinese share prices are ludicrously high.

But with China's economy on track for its fifth consecutive year of double-digit percentage growth, the market is simply looking farther into the future to value stocks, others say. And that future justifies such prices -- except perhaps for resource stocks.

The current A-share bull run is very similar to what happened previously in Japan, Korea and Taiwan, when those economies and markets took off in the 1980s and 1990s, says Miao Junwei, CEO of ABN AMRO TEDA Fund Management.

Shanghai's stock market is up five-fold since the start of 2006. It is trading at above 40 times projected earnings for this year, dwarfing the S&P 500's (.SPX: Quote, Profile, Research) 16 times. But it is still well below the 70-plus hit by Taipei at its peak in 1990, for example.

While the yuan currency keeps appreciating against the dollar and profit growth remains strong -- and there's no sign of this changing -- many blue-chip prices may continue climbing, and an extended pull-back is unlikely, Miao believes.

ICBC OVERTAKES CITIGROUP

Take Industrial and Commercial Bank of China (ICBC) (601398.SS: Quote, Profile, Research)(1398.HK: Quote, Profile, Research), the country's biggest bank. When ICBC overtook Citigroup (C.N: Quote, Profile, Research) as the world's largest bank by capitalization in late July, it was seen as an especially absurd sign of a bubble.

Citigroup, one of the world's most sophisticated financial institutions with operations around the globe, posted net profit of $21.5 billion last year, over three times profits at ICBC, a state-controlled behemoth that is trying to modernize itself and operates almost entirely inside China.

But there's method behind the madness. ICBC has a network of around 17,000 branches across China. Citigroup, with more than a dozen Chinese branches, incorporated locally this year and entered the yuan retail banking sector, but it is unlikely ever to have a Chinese network approaching CIBA's.

The Chinese bank's earnings may grow faster than Citigroup's for years. ICBC announced a 76 percent jump in third-quarter profit last week, while Citigroup's third-quarter net fell 57 percent, partly because of exposure to the U.S. subprime loan crisis.

China's United Securities analyst Ge Jinbo estimates ICBC's profits will keep rising strongly on the back of China's economic expansion, which should produce national loan growth of about 10 percent a year, and surging non-interest income as it diversifies into areas such as insurance and investment banking.

ICBC's earnings are expected to catch up with Citigroup's by 2010, he wrote in an article this month, predicting annual profit growth of about 35 percent in the next few years.

ICBC, which now has a market capitalization above $300 billion against Citigroup's $212 billion, also has plenty of money to grow through acquisitions. Last week it said it was buying 20 percent of South Africa's Standard Bank Group (SBKJ.J: Quote, Profile, Research) for $5.6 billion, the largest foreign investment in Africa.

ICBC's relatively backward retail banking operation could actually help earnings grow, as the bank takes modernizing steps that Citigroup and other Western banks took long ago.

M&A TO BOOST GROWTH

Acquisitions may spur growth of China's blue chips in the next few years. At home, the government wants to consolidate industries to improve efficiency, and Beijing is encouraging investment abroad as it seeks access to resources and markets.

Another positive factor may persist for a year or two -- injections of major assets into listed firms by their state parents.

SAIC Motor (600104.SS: Quote, Profile, Research) quadrupled its earnings this year, and rocketed to become the world's ninth largest auto maker by capitalization, exceeding General Motors (GM.N: Quote, Profile, Research), by obtaining manufacturing ventures from its parent in a $2.4 billion deal.

The government now appears to be grooming SAIC as a national car champion by encouraging mergers with other local players.

RESOURCE FIRMS DOUBTFUL

In general, fund managers argue stocks related to consumer spending growth may deserve their high valuations. Lower labor costs, first-mover advantages and huge local networks of branches and customers may help these firms beat foreign competition.

Fund managers are most skeptical about valuations in the resources sector. Oil giant PetroChina (0857.HK: Quote, Profile, Research), for example, which last week raised $8.9 billion in a Shanghai share offer, is now the world's second largest oil firm by market value, second only to Exxon Mobil (XOM.N: Quote, Profile, Research).

In contrast to consumer stocks, resource firms' margins are in the long run expected to depend mainly on the cost at which they can obtain their raw material from abroad, while the global commodities markets mean they are unlikely to get away with charging their customers any premium.

I really don't understand why China's resource firms should command such high premiums to their overseas peers, a senior portfolio manager at a major Chinese house said.

PetroChina, like its foreign counterparts, sells its crude oil at international market prices and it does not hold any advantage in terms of reserve replacement.

Japan China ABN Amro Investment