Great Wall of China_300.
(photo credit: Reuters)
The single greatest economic story of our times – let’s define that as the last
30 years, although there are some readers who will take that phrase as a
reference to Queen Victoria, and others to FDR – is the rise of China. Literally
hundreds of millions of people have been lifted out of poverty, so that the
Chinese “economic miracle” that is commonly dated from 1978 is on a scale that
dwarfs any other, whether in Asia or elsewhere.
Not surprisingly, many
foreigners have sought to jump on the Chinese bandwagon and get rich along with
China – yet remarkable few have succeeded. Most of those who made the effort to
go to China and create or buy into companies there have fallen victim to one or
other of the common Chinese economic maladies, namely being cheated by your
local partners, having your intellectual property copied and/or pirated, being
blocked by the bureaucracy (central or local government) or otherwise
discriminated against. These victims include many of the largest multinationals
and many more small firms and individual businessmen and investors.
even people who took the lazy way out and simply tried to invest money in
Chinese firms traded on stock exchanges have found it hard to ride the Chinese
dragon and alight safely, profits in hand. A Bloomberg story earlier this week
marked the 20th anniversary of the opening of an investment avenue into China
via the Hong Kong Stock Exchange. During those 20 years, China has grown at a
stunning pace and has become, in many respects, an advanced country. Yet the
story illustrated how little the smart money that rushed to participate in this
growth when the opportunity was awarded had to show for its 20-year sojourn in
the Far East: If you bought and held in Hong Kong for 20 years, you are up about
1 percent overall. Even today, few people who would have guessed that the result
would be so very disappointing; US Treasury bills were a much better
The message contained in this anecdote is that there is
remarkably little connection between GDP growth and stockmarket returns, at
least on the upside. A country can achieve remarkable growth over many years,
without that necessarily translating into a boom in equities. For one thing,
there must actually be a stock market, preferably one that offers liquidity and
contains a fairly broad selection of interesting companies.
example: The Israeli economy grew at 10% per annum for 25 years, from 1948
through 1973 – a feat matched in that postwar generation only by Japan – but the
local stock market only got into the act at a late stage and was too small to
allow any meaningful participation even by local investors (such as they were,
at that time), let alone foreigners (who, by and large, wouldn’t touch
The China story is looking especially threadbare this year, as
this column has noted several times. But that is just part of a wider
phenomenon, in which the entire concept of investing in emerging markets (EM)
has fallen apart. The “BRIC” countries – a term coined some 12 years ago by
Goldman Sachs’s Jim O’Neill for the four large and seemingly mostpromising
economies in the “EM universe,” namely Brazil, Russia, India and China – have
all gone sour more or less simultaneously, although not for the same
China has a host of problems that are forcing it to grow less
quickly, and, some fear, its growth rate will drop much further.
exposed the fact that Brazil’s surging growth over the last decade was based
primarily on exporting raw materials to the rest of the world, first and
Russia’s economic boom was always a raw-materials story,
with oil and natural gas heading a long list of items that Russia exported to a
commodities-hungry world. India was a quite different case, underlining how
little these countries had in common and how badly the BRICs fit together, even
before they started crumbling.
But the key thing they had in common was
that, thanks to people like Jim O’Neill and the other cheerleaders of the EM
mania, Western money poured into them on a huge scale.
The result was
that they all rose together, and they are all falling apart together. But the
real story will be which of them will be able to recover and mature into
slower-growing but more-stable economies. The current period of decline and
slump provides the opportunity for the real smart money to do some homework and
find countries and companies that have a positive long-term outlook and that
offer real opportunity to outside investors.