I remember 1993. I was finishing up at Purdue and the U.S. was in a nasty little recession. Not a good thing for a new college grad.
The entire world, however, was not quite as dreary as the U.S. Another part of the world was experiencing an absolute economic miracle and would surely lead the world of business into the future.
MBA programs taught its business philosophies and legions of college kids minored in its language. The nation was Japan, and in 1993 we were told this small island nation was to be the next economic super power.
Well, this school of thought just didn’t quite work out as expected. Twenty years later, the Japanese remain stuck in a nasty bought of deflation and their stock market is worth less than 50 percent of what it was then.
But don’t let history distract us from a little déjà vu. I also remember 2007; hearing once again the U.S. days of dominance would soon be ending, hearing the new century belonged to a new nation.
This time China was destined to be the super power of the future. Some of the more aggressive analysis at the time showed China’s economy usurping ours by 2016; Goldman Sachs said it would happen by 2027. I may have even written about it, but I didn’t believe it.
To be clear, the Chinese economy is growing quickly as its population experiences rapid urbanization. The Chinese business model of creating low cost exports has enticed a generation of peasants from the farm to the cities. These new Chinese urbanites can earn around $12,000 a year, a super dramatic increase from the $1,000 income level earned on the farm.
This explosion in income has ignited a Chinese consumer class creating tremendous opportunities for companies able to operate and serve this new demand.
Like the Japanese however, the Chinese have systemic problems, and many of these problems have deep roots.
The Chinese one-child policy is a long-term economic disaster. Without an expanding base of workers, Chinese growth simply must taper. It’s been said China will be old before it is rich.
The Chinese banking system is a wild place where 45 percent of lending last year was sourced to unregulated “shadow banking system.” This hidden level of risk will create inevitable financial shocks.
Most of all, the Chinese government is the model of corrupt central planning. The values making America great such as free enterprise, private property rights and respect for the individual are not shared by the Chinese. Burdensome Chinese government at all levels has created an environment of inefficiency and corruption. Just go to YouTube and search for the “China ghost city”.
So do I invest in China? Yeah a little bit. But to me while the opportunity may be there, the risks are definitely there. I continue to think the U.S. is a better long term bet, just like 1993.