Is China the greatest investment opportunity in the world? Or is it a bubble?
It could be both, as the two often go hand in hand. A decade ago, the Internet represented the world's best opportunity but also its most precarious play.
Now, the China story is undeniably compelling. An economy of a billion people, many of whom are still living in rural poverty, swiftly being brought into the modern world of technology and trade. If growth comes from the liberation of human potential, then China may be the greatest growth story ever told.
Growth means change. Change means uncertainty. Uncertainty means difficulty in assigning rational value to investments. In the face of that difficulty, it's hard to resist letting the growth story sweep caution to the winds. Why not invest every penny in China, no matter what the price? Last week, China displaced Japan as the second largest economy in the world! How can you lose, if you're just patient?
Of course, in China's case, the investment thesis is not just a question of whether stocks are reasonably valued. No, when my institutional clients worry about China being a bubble, they're talking about China itself -- the county, the economy, not the stock market.
My clients worry that for all China's rush to modernity, it's still basically a totalitarian communist country. Its economy is directed -- some would say manipulated -- by a political elite that controls a vast web of state-owned banks and industries. It can dictate interest rates, exchange rates and capital controls. Indeed, with a wave of its hand, it can command whole new cities to be built where last year there was nothing but wilderness.
That's not an exaggeration. If you spend much time on the web, you've no doubt seen pictures of the "city to nowhere" in Mongolia -- a huge, brand new modern city that was built on command -- but never occupied. You'd call it a ghost town, but it never lived. Its skyscrapers were never occupied, its roads never driven. And there it sits.
And so the skeptics ask: Is all of China's rapid economic growth is just an illusion? Building that empty city in Mongolia employed millions of workers and consumed billions of dollars in materials. But it was all for nothing -- so maybe that growth didn't really exist.
I suppose you could say the same thing about all the "stimulus" spending here in America over the last year. We don't even have much growth to show for it. But that's another story for another column.
There's another interpretation. One China expert I know tells me you just have to write off the Mongolian city to the massive inefficiency of communist control of the economy. He says that some poobah in some bureaucracy decided that there needed to be a new provincial capital -- and so one was built. Then for some reason he changed his mind.
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