invest in China, Chinese investments, Bill Bonner

Should you follow the crowd into China?

20.10.2006

by Bill Bonner

Our Most Popular Articles

This genius investor does dizzying levels of research to uncover...Half Price Shares!

What goes up and doesn’t come down? China perhaps? In Six ways to cash in on the China growth story, readers are invited to ‘cash in’ on the ‘China growth story’.

Here’s why they might want to keep their cash closer to home. We take it for granted that power and money are flowing from West to East. How much, how fast? We don’t know.

But both in theory and in headlines the East is rising. Nor is there any theoretical or practical reason why this big trend should end anytime soon.

At the same time, we also take for granted that anyone who invests casually in China will get what he deserves. You can be very right about a major trend, and still lose all your money betting on it.

China is the same country that put up with Mao Tse-tung for three decades. Only a generation ago, mobs of lunkheaded Chinese fanatics filled the streets… dragging some poor ‘intellectual’ or ‘capitalist roader’ along so that he could be humiliated, tortured and even executed.

What kind of a crime did you have to commit to deserve that treatment? None at all. You might have read a book. You might have made a comment such as, “is it really necessary that I tell the Party what my wife and I talk about in private”? You might have made the mistake of getting one pig too many in your backyard. Or you might have just been in the wrong place at the wrong time.

Why are investors crowding into China?

China was clearly the wrong place. And the 1960s was clearly the wrong time. Only a damned fool would have wanted to be there. But now, say the expensive suits, the new China is the place to be. Foreigners can’t wait to get there. And if they can’t get there in person they send their money.

Fixed-asset investment as a percentage of GDP has reached nearly 50%. This is partly the reason the East is growing so fast and partly the result of it. Rapid growth requires huge amounts of capital investment. Rapid growth also entices capital; investors want to get in on it.

The result is the phenomena we live with, what Nobel Laureate Edmund Phelps calls “thinking, expectant beings”.That investors are expectant is beyond question. That they are thinking merely raises more questions.

Investors in China expect to make a lot of money from the Rise of the East. They’ve taken a trip or two to the Middle Kingdom. They’re probably convinced that it is in the centre of a vast transformation and probably fairly sure they can make a buck on it.

They’ve seen the building cranes, watched the factories going up, seen the numbers mushrooming, and perhaps almost been run down by a speeding Mercedes. So they can’t help but think they’re onto something big. So they bring in more investment capital to take advantage of it.

But here is where the thinking seems to stop. Yogi Berra once remarked of a restaurant – “Oh, nobody goes there any more; it’s too crowded”. He was highlighting a problem for investors as well as diners. A good deal is a good deal only so long as too many people don’t try to take advantage of it.

In the restaurant world, good eateries soon become overcrowded, service deteriorates, prices rise. In the investment world, when too much capital chases too few good opportunities, returns sag and even go negative.

Have the best opportunities in China gone?

Initial investors in a new trend often do well. They are able to choose the best opportunities at the best prices. Those who come along later have progressively less and less choice and higher and higher prices. As prices rise, so do expectations.

But as expectations rise, thinking declines. Logically, as the amount of money flowing into a market increases, prices should rise and the attractiveness of the opportunities recede. But investors are not merely thinking beings – and not even primarily thinking beings. That they think at all is open to argument. But that they let themselves be driven by emotions rather than thoughts is just the way things work.

Asia began pulling itself together many years ago. One country after another has picked itself up and zoomed to the top of the list for investors. Singapore was the darling of global investors in the mid-1980s – with a ratio of fixed-asset investment to GDP equal to China’s today. Then Japan hit the charts and soared until 1990, when it dropped off for the next 16 years. The late 1990s brought Thailand, Malaysia, Korea. And now it’s China’s turn.

Such a big country it is, and such a big opportunity, that it is gobbling up a huge part of the investment capital of the whole region. Now, only China has a fixed-asset to GDP figure over 30%. In fact, its ratio is closer to 50%!

What comes next for China? A crash of some sort is our guess.