When historians look back at the first decade of the 21st century, they will say that its single most important event was not 911 and ‘The War On Terror’, but the rise of China.
In the last 10 years we have seen the beginning of a change in the political and economic world order. China has been flexing its muscles and asserting its influence around the globe. It is both admired and feared. The total dominance of the West is now under much doubt, as its’ financial engine ceases up, polluted by the credit crunch and damaged by erroneous investment engineering.
China has benefitted from the collapse of the Anglo American hegemony. Its economy is not dominated by a free market financial sector and its people save rather than rely upon credit. But this is true of most developing nations. The difference is, is that the free market exists to a much greater extent in the other BRIC’s and emerging nations.
China is different. India has Tata and Reliance Industries. Russia can boast Lukoil, Gazprom and Sibneft. Brazil can include Vale do Rio Doce, Telebras and Petrobras. Conversely, it is really hard to name three great (and independent) Chinese companies, yet 70% of its economy is private.
China operates a system of one party dictatorship with a market economy (“Market Leninism”). Therefore, when Chinese companies invest overseas, they have to have the support and permission of the government.
This can be highly beneficial. China sees the private sector as an individualistic extension of itself and the rewards for the compliant business can be tremendous.
Western economies rely on a structure of laws, regulation and open competition to ensure that companies fall in line. Companies in China, on the other hand, operate within a government-led, relationship-based structure.
As such, when evaluating a Chinese company, investors should not just look at the governance and accounting indicators. Rather, they should also assess the firm’s ownership type, corporate structure and equally important, the political environment within which it operates.
A lack of independent institutional leadership is an additional problem. A stock choice is an opinion acted upon. But where do you find published independent opinion on equities, when there is no freedom of expression or corporate transparency? There is no CNBC or Bloomberg studio transmitting from Shanghai. The tough questions asked of Chinese banks and fund managers live on TV emanate from Hong Kong and Singapore.
Investor stock choices in China are usually a direct reaction of stated government proclamation and policy. The biggest Chinese red chips are government owned and political influence is all encompassing. Thus the ordinary investor reacts to official statements accordingly.
At this point, I have to add a clarification. I believe in the future of the Chinese Economy. Without a doubt, the rise of China would not have happened anywhere near as fast or as surely without the policies of the Chinese government. I also believe that there are some tremendous opportunities for all investors who commit to the long term. However, the myth of China is that it is the worlds leading emerging market for investors. It patently is not. Amongst the BRIC’s, over the last two years, it has been the laggard. Below, is the one-year chart, comparing 2823.HK, the Shanghai A Share ETF with RSX of Russia, INP of India and Brazil’s EWZ. Its results are at best, poor in comparison, this despite a stellar start in January 2009. Take a look at the chart below, which illustrates the growth within the aforementioned ETF over a one year period:

From Newsweek, January 14th 2010
Why Colombia's Stock Market Beat China's
Rana Foroohar
If you had any doubt about what Fareed Zakaria calls "the rise of the rest," consider a new Bank of America Merrill Lynch report on the performance of emerging markets over the past decade. If you had invested $100 in -emerging-market stocks on Dec. 31, 1999, you'd have $262 today, while $100 invested in the S&P would be worth $91.
The most surprising thing about the study: tiny Colombia tops the list of performers, with a 1,529 percent return over the past decade. That's basically a commodities story (the South American nation is rich in coal, copper, and gold), and indeed, the huge global demand for everything from oil to minerals to agricultural crops (due itself in large part of the rise of developing nations) has made numerous poor nations richer in recent years.
An even bigger surprise is that BRIC darling China actually underperformed its peers, rising only 150 percent compared with energy-rich Brazil (520 percent) and Russia (326 percent) or well-regulated India (274 percent), which some investors see as a safer and more diverse bet compared with the Chinese equity market, which is dominated by bank stocks.
The final Myth of China, is that it should be an automatic selection in any portfolio. This is at once absurd and misguided. It’s equity markets are highly volatile performers that rollercoaster without the stability provided by major institutions.
Under its present structure, it is vulnerable to the whims of government policy and a population who invest as if the Shenzhen A was a roulette wheel. For these reasons it will always form part of my savings plan portfolio but not necessarily within my lump sum structures, at least not until I can see some long term value.
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