I’m not bullish on China, neither as a place to do business nor as a place to invest. China has for over two Beach House Blackhead decades been “the next big thing,” and even though there have been minor gains I have always maintained that the society is not built on a foundation of trust which we tend to take for granted in the West. I believe her long-term prospects are not bad, albeit extremely over-valued at the moment.
This morning two articles landed in my Inbox from two very different sources. The first is your standard “I’m Bullish on China” article, from Finance Asia blog:
The Heritage Foundation once again ranked Hong Kong as the world’s freest economy this year, and in our web poll last week readers agreed with that assessment.
For the 17th year in a row, Hong Kong topped the class thanks to its small government, low taxes and light regulation. Barriers to entry are low, property rights are secure and contracts are respected. In short, the conservative think-tank reckons Hong Kong is a Tea Party paradise. On paper, at least.
The article makes it clear that Hong Kong is not China per se, but the sentiment is there. The race to open the financial floodgates between the two economies has peaked over the last two years, and for most foreign investors getting exposure to Hong Kong equals getting exposure to the mainland economy.
Now, Blind Freddy can see that the existence of trust in Hong Kong (a British colony until recently) does not equate to the existence of trust in mainland China. But what if there was a different way of looking at this problem of trust? Maybe the fact that China is doing things completely different to the US is a strong point?
Dilbert artist Scott Adams gives us this perspective:
China’s system, as I have written before, reminds me more of a corporate structure, or a meritocracy. In a corporation, you’re generally free to disagree with higher ups if you do it with data, and in a professional manner. Usually you need to go through proper channels, but dissent is generally allowed, and sometimes actively encouraged. If you’re a jerk about your disagreement with your superiors, or you don’t have persuasive data to back up position, you could get fired. But that’s a stupidity issue, not a freedom issue.
China’s leadership is packed with engineers and lawyers by training. I imagine that like any corporation, they appreciate the value of information when presented in a professional manner, and through proper channels. Unlike elected politicians, managers in a meritocracy are free to change position as new or better data emerges. The advantage of having only one political party is that everyone is on the same team. And if effectiveness is the goal, which apparently it is in China, I assume that new data is generally welcome.
Wild assumptions aside, Adams does have a point, and perhaps the best argument I have seen so far in favor of the Chinese System ™.
While Freedom of Speech is important on an individual and human rights level, it would have to be one of the most destructive forces around when it comes to actually getting things done. China may have the right idea, somewhat akin to Japan’s kaizen of the 1970s and 80s (which led to improvements in the toilet seat that still blow my mind to this day).
Adams’ readers are knee-jerk-quick to point out the flaws in his argument, but, at the risk of coming off pro-China, I think what he says definitely has merit. As I mentioned, one of the greatest periods of innovation (well, improving on things they copied from the West) in Japan came about under similar conditions as in China today.
But for long-term prospects, I’m still shorting China. Anyone who has spent time in the mainland has no doubt experienced first-hand the fact that Chinese are all out for themselves, short-term profits over long-term sustainability. This is deeply ingrained in their culture, and isn’t going to change any time soon.