In this Article:
- There is Never a Shortage of China Bulls
- Bad News for Investors in China
- Does Investing in China Still Make Sense?
- Why the Collapse of China’s Property Bubble Matters
For much of 2021, many global stock markets partied like it was 1999.
Yet it seems that no one bothered to invite China.
Even as the S&P 500 jumped about 26%… China’s CSI 300 benchmark of domestic stocks eked out a gain of only about 5%.
Still, there is never a shortage of China bulls in the investing world.
Hedge fund Bridgewater founder Ray Dalio believes that China should make up a big chunk of your portfolio to reflect its weight in the global economy.
Berkshire Hathaway (NYSE: BRK-B) Vice Chairman Charlie Munger recently bet big on a rebound in Alibaba Group Holding Ltd. (NYSE: BABA) – China’s answer to Amazon (Nasdaq: AMZN).
And by dint of China’s size, more than one-third of the benchmark iShares MSCI Emerging Markets ETF (NYSE: EEM) now consists of Chinese stocks.
China bulls believe that China has all but taken on the mantle of global economic leadership from an increasingly chaotic U.S.
A minority of others say the opposite.
They argue that we have already seen “peak China” – and that the coming decades will see China struggle as it unravels the consequences of its decadeslong debt-fueled overinvestments.
Expect this latter view to become the new conventional wisdom.
Bad News for Investors in China
Bad news for investors is coming out of China thick and fast.
It started at the end of 2020 when Chinese regulators torpedoed the IPO of Ant Group – a subsidiary of one of Munger’s favorites, Alibaba – at the very last minute.
A clampdown on profit-seeking education companies in August 2021 came next, wiping out tens of billions of dollars from Western investors’ portfolios.
Most recently, the looming collapse of the world’s largest property developer, China Evergrande Group, has hit the headlines.
Investors, it seems, are living in a kind of rolling crackdown when it comes to investing in China.
And no one knows which sector is up next.
Still, there is one common theme.
The Chinese Communist Party has decided that portions of the booming private sector represent a threat to its power.
And there is no way the Chinese Communist Party will tolerate that.
Notwithstanding the optimism of Dalio and Munger, the question arises…
Does Investing in China Still Make Sense?
The risks of investing in China are high.
First, the rolling crackdown has reminded investors of the political risk of investing in China.
The risk that Chinese President Xi Jinping will wake up one morning and decide that a given sector is now off-limits to foreign investors is higher than ever.
Second, there is regulatory risk. A faceless bureaucrat in China can change regulations overnight… and at his whim. And there is zero concern for the interests of foreign investors.
Finally, the financial accounts of Chinese companies are often cryptic and outright deceptive. As a result, Chinese companies have fleeced U.S. investors for billions of dollars over the past decade. (See the documentary The China Hustle.)
Yet there is a risk out there that is greater than these factors put together.
And that is the unwinding of China’s remarkable growth story.
Yes, Chinese property developer Evergrande is getting crushed under $300 billion of debt.
But the unwinding of Evergrande is just the canary in the coal mine. Many other property developers in China are in the same situation.
Some call Evergrande’s collapse China’s “Lehman moment” – in reference to the failure of investment bank Lehman Brothers, which unleashed the global financial crisis of 2008.
And here’s why investors should care…
The property sector accounts for close to a third of the Chinese economy.
And it’s sitting atop what Goldman Sachs has called a $52 trillion bubble.
To put that number in perspective, $52 trillion is…
- About 2.5 times the $21 trillion U.S. GDP in 2021
- More than 35 times the value of all cryptocurrencies combined
- More than 50 times the market cap of Tesla (Nasdaq: TSLA).
Today, the value of Chinese real estate exceeds the value of all the real estate in the United States, Europe and Japan combined.
If the Chinese property market dropped by just 10%, it would be the equivalent of Japan’s GDP disappearing into the economic ether.
And some property prices in China have already fallen by as much as 30%.
Suffice it to say, the collapse is well underway.
Why the Collapse of China’s Property Bubble Matters
Some argue that “what happens in China stays in China.”
Indeed, much of China is insulated from the outside world.
And so far, the Chinese property meltdown has only hit the offshore bonds issued by property developers.
A more significant issue is the viability of the Chinese growth model.
China’s debt-fueled growth has generated a big chunk of global GDP growth for two decades now.
But that all changes if China’s growth model stalls. And revamping that model will take decades – just as it has for Japan following the collapse of its property bubble in 1989.
Much to the world’s surprise, the U.S. may even replace China as the leader of global growth.
China is a treacherous market. And it is likely to get more treacherous in the years ahead.
Yes, investors may make money in Chinese stocks with a well-timed bet or two.
But those investors will be more lucky than smart.
For me, investing in China is fraught with risk. And it’s just not worth it.
“China miracle” R.I.P.