It was recently announced in somewhat wondrous tones that new car sales in China this past year exceeded one million. Reports in BusinessWeek and Forbes trumpet the growth of China and the size and promise of Chinese markets. Several economists have suggested that Chinese gross domestic product will once again surpass that of the U.S. by the year 2020, two hundred years after Chinese GDP was nearly one-third of the world's total. Those optimistic about China's economic future have poured the equivalent of billions of dollars in foreign investment into the country.
On the other hand, Joshua Kurlantzick, writing from Shanghai in The New Republic three weeks ago, paints another picture. His is of a China with a failed banking system with 50 percent of non-performing loans made to state-owned enterprises to satisfy political pressure; rampant corruption; false reporting of growth, beginning at the provincial level to conform with announced national goals; an economy that is propped up by foreign investment; and a country that is actually using less and less energyenergy use being a reasonably reliable indicator of real growth. In short, he describes China as a house of cards that is being held up largely by a Communist regime and foreign investors who are for the most part silent about the results of their Chinese investments.
Where does the truth lieat the extremes or somewhere in between these wildly different views? For those of us who believe in free market economies, what's the best that we can hope for? A Russian-style transformation to more social and economic freedom? A collapse and rebirth of the Chinese economy would dwarf what happened in Russia. For example, it is estimated that more than half a trillion dollars would be required just to put the Chinese banking system on reasonably firm footing. Less optimistic views envision everything from a more violent transition to a pull-back to a more dogmatic form of Communism by a threatened leadership. Is it possible that the very investments flowing into China today could eventually trigger a Chinese economic meltdown?
What kind of risk-reward profile does this represent for foreign investors? What priority would you give to investment in China in you were the CEO of a large multinational? Could you afford to stay out? Could you afford to invest heavily in fixed assets if you went in? Will this be the next great growth market for investors? Or will it implode with a force greater than that of the U.S. high-tech bust of the past few years? What do you think?
Joshua Kurlantzick, "Asia Minor," The New Republic, December 16, 2002, pp. 20-25.