I have to admit I’ve never been a big believer in the rising China theme that has captivated the business world in the past decade.
Now don’t get me wrong, there is no doubt China’s enormous population trend of rapid industrialization definitely presenst the foundation of a generational opportunity for the right global businesses.
There are, however, some important parts of the China story that make me take pause. As we all know, the Chinese political structure is constructed on a sort of distorted version of communism and central economic planning.
The corresponding trends of rapid industrialization and central planning make me nervous. The rapid development process, like the economic evolution experienced in the U.S. during the first 30 years of the 20th century, has been historically chaotic and messy. Chaos is important during periods of rapid progress as it allows a free market system to practice creative destruction, which is the process of weeding out the weaker economic players and allocating resources and capital toward the survivors.
What emerges as a result of creative destruction is innovation and ultimately opportunity. When a government attempts to control rapid development, it invariably corrupts the process and this tends to result in what has always scared me about China: bubbles.
China has brewed its share of bubbles. The Chinese stock market remains roughly 40 percent off its highs of 2008 and the Chinese urban real estate market has been exhibiting bubble like price behavior for years. If you want to see a prime example of this phenomena, go to YouTube and search for the Empty Chinese City video.
The inclination toward bubbles has made me approach Chinese investment strategies with great caution and skepticism. As a result, my Chinese positions have been small and infrequent.
Recent developments in China, however, have me taking a new look. Growth has moderated to about 8 percent, and continues to be achieved more and more through growing domestic Chinese demand as opposed to relying primarily on exports.
The real estate market appears to be simmering down a bit, and bad real estate loans appeared to have peaked. The government also appears more open to providing monetary stimulus to the economy to promote growth rather than simply manipulating development for growth’s sake.
While I’m not going to bet the farm on China, I think it could be a productive part of a 2013 investment strategy. I’m not brave enough to buy individual Chinese stocks; I prefer to use the ETF FXI to track the Chinese market in general.