The Chinese China Skeptic

So, first, let's get this out of the way: I'm a China skeptic.

When you get ripped off enough times in Beijing, you'd also be a bit skeptical of the next lady who says: "Handsome boy! Big discount, best prices!" Or as you're coughing the smog out of your lungs, you read the newspapers announcing the fifth straight "blue sky day" and realize that although you don't smoke, you might as well, because the pollution is killing you just as quickly. That would make you just as skeptical as I am about the Chinese government.

Or when you see on every TV channel or hear on every radio network some economist, analyst, pundit, or talking head expressing yet another opinion formed 7,000 miles and an ocean away from China … well, maybe you should be pretty skeptical of the so-called China expert, too.

With good reason
I was born in China and raised in its countryside in a small, mountainous village. I've worn a suit and tie in tier-1 metropolises, donned hard hats in tier-2 and 3 cities, and marveled at the rapid growth in rural areas like my hometown. When someone wants to ask me about China, I ask: Which one?

That may seem like a strange question to most lao wai (foreigners), but it impressed me quite a lot that James Fallows, author of Postcards From Tomorrow Square and national correspondent for The Atlantic (also the one-time archenemy of "Clippy" during a brief stint at Microsoft (Nasdaq: MSFT  ) ), understood. When he came to give a talk at Fool HQ, that was one of the first misconceptions he addressed.

Does China even exist?
"There are some senses in which there is a unified country of China, but there are more senses in which you have dozens of provinces, very strong regional rivalries, thousands of little businesses, and hundreds of thousands of squabbling bureaucrats," Fallows told his Foolish audience.

Having lived in China since June 2006, traveling extensively throughout the country, Fallows has a sophisticated understanding of China's fragmented identity and the pieces within them. In the same way I might play categories with "redwood" and "maple" (they're both trees, right?), a foreigner might not see any difference between PetroChina (NYSE: PTR  ) and China Green Agriculture (AMEX: CGA  ) . (Hint: our Global Gains team picked the better one.)

While we might joke about the whole of China plotting against us, Fallows notes that "for the individual Chinese person and Chinese family, the dream is more money next month. And for the government, I actually believe it's the agglomeration of those ambitions, of having a continually rising GDP."

That's an important thing to understand. For all its obscurity and opaqueness, the Chinese government's top priority is probably still internal economic development, as well as simply making sure that each new day is better (or at least richer) than the last for its citizens.

Not all is what it seems
Now, I'm quite aware that that might seem like a type of naivete that would have even a Disney editor slashing frames, but there's a real political incentive for Beijing to focus on continually improving the standard of life for its citizens.

As Fallows explains: "Until the late '70s, China was a land of non-stop catastrophe. ... The fact that if you're of child-rearing age, you can remember nightmares and disaster -- I think that is a powerful, let's just say 'steady as she goes,' force in China now."

I can corroborate this. Contemporary China is a more material society than all the bodhisattva figurines and tai chi practitioners might lead one to believe. When kids get out of school, they're not looking forward to meditation groups and tea ceremonies: They're congregating in Yum! Brands-owned (NYSE: YUM  ) KFCs -- which, by the way, offers much spicier and tastier recipes in China -- and sipping on Cokes. (Both Yum! and Coca-Cola (NYSE: KO  ) have made major investments -- and, as a result, inroads -- in China.)

They wouldn't be able to do that if their parents weren't earning a more comfortable living, or if their friends didn't have access to a plethora of public transportation options to get home. When people can remember sharing a single television set among a whole village, continued economic prosperity is a strong incentive for political stability.

So what about that skepticism?
You may recall that I used a very particular adjective to describe Fallows' understanding of China: "sophisticated." What makes it so is that he understands that China is, if nothing else, not a land of extremes: "National cultures have intrinsic and invented or imposed mythos ... in China there is a -- not pure race mythos -- but a '5,000 years of culture' mythos."

Nowadays, that same ancient culture that constructed the Great Wall coexists with the fast-food culture and the golden arches of McDonald's (NYSE: MCD  ) . And undoubtedly, that mythos and its internal contradictions create many situations that are unclear or misleading, but not necessarily unworthy of investigation. For both its residents and its investors, China is certainly risky, but not necessarily unsafe.

The Chinese call their country the Middle Kingdom, and as an investor, ex-resident, but now also a foreigner (as a citizen of the U.S.), I too take the middle path, approaching China with interest -- checked by caution and doubt -- and sprinkled with hope.

Down this path to the Middle Kingdom, it pays to be a skeptic: While mysterious, China isn't impenetrable; while dense, China is no longer closed; and while we still may not all be enlightened, by treading softly I'm sure we can all get there.

If you're interested in joining me down the path of enlightenment (who said skeptics can't be spiritual?), leave a comment below. If you'd rather go it alone, our Global Gains team might be able to help you begin your cautious but inquisitive search.

Sean Sun does not own any of the stocks mentioned. China Green is a Global Gains recommendation. Coca-Cola, Disney, and Microsoft are Inside Value selections. Disney is also a Stock Advisor pick. Coca-Cola is also an Income Investor pick. The Fool has a disclosure policy.


Read/Post Comments (22) | Recommend This Article (63)

Comments from our Foolish Readers

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  • Report this Comment On September 04, 2009, at 11:23 AM, catoismymotor wrote:

    Sean,

    Thank you for this article. It is good to have the perspective of someone that has experienced China as an "investor, ex-resident, and foreigner" as you out it.

    Cato

  • Report this Comment On September 04, 2009, at 12:05 PM, theHedgehog wrote:

    Jack Welch has been preaching this message of prosperity + consumerism = pacification for quite some time, and I think it's a good message - right up until it fails.

    China has more or less 1.3 billion people, and I suspect that they are on the verge of extreme population pressures from water shortages due to mismanagement as well as energy shortages and an almost total lack of environmental protection. Food distribution will become an increasing issue if they Westernize their diet. But, maybe they'll get it sorted out "just in time". It all depends on whether China can keep a handle on their population growth, I think.

  • Report this Comment On September 04, 2009, at 1:37 PM, VietnamVet1 wrote:

    Who owes whom almost $1,000,000,000,000.00??

  • Report this Comment On September 04, 2009, at 5:41 PM, stockmenot wrote:

    NO EFFIN KIDDING!!!!!!!

    Thank you Vietnam Vet for putting it in perspective. With their population exploding, they will just squeeze the rest of us all that much more, taking more of the World's goods and services,(like we used to do) replacing us in the world market. They will have the money to do so.

    It will take awhile for the overpopulation to cause them to slow down. After all, it takes a generation, which is how long it took for us to lose our wealth.

    By the time it hurts them, we will be too busy working in their factories to notice.

    Invest in prospering nations, even if it's not your own. You might need someday just to eat.

    I hate to be so synical, but I've NEVER seen our Country in such bad shape!

    I believe the govt officials and large investors are the ones encouraging us to invest here, by giving us overly optimistic reports, for their own obviously greedy reasons.

  • Report this Comment On September 04, 2009, at 8:57 PM, ds10 wrote:

    As stated in an above comment, " It all depends on whether China can keep a handle on their population growth."

    Isn't China already doing this with the "one child per

    family" program?

  • Report this Comment On September 04, 2009, at 10:21 PM, drericrasmussen wrote:

    In 1981, while at Chemical Bank, I wrote a report predicting that a nation still reeling from the aftermath of the Cultural Revolution could attain annual GDP growth of at least 6% per year in the 1980's. People laughed. China? You must be kidding. Growth exceeded 9%

    But a nation with many engineers, a high savings rate, and respect for education can attain great things. This won't last. The rapid slowdown of the growth in the labor force will require a much higher level of capital investment in the future if productivity is to increase.

    Moreover, China has its dark sides also. While Mao is gone many "little princelings" in the business world see a publicly listed company as a means to attract capital with hype and either deliver little in return or some in return but dilute that with new shares. Investing in China takes a lot of research. Choose carefully and don't bet the ranch.

  • Report this Comment On September 04, 2009, at 10:38 PM, kayakmastr2 wrote:

    I am sorry. This is a rambling essay. It contains few if any facts. It says be careful about China investments, then says GG will guide your way, without any data support that claim. I happen to believe that China offer great opportunities and that GG will guide that way, but I would like to see essays that provide data to support that belief. China is sending their best students to the US to learn, many have stayed, but many will return, to challenge us as the World leader in all areas. If I were younger, I would begin to learn to speak and write Manderin,

  • Report this Comment On September 04, 2009, at 10:49 PM, OlderPro wrote:

    Mr. Sun,

    Very good article.

    I wonder if you would have the courage to address the illegal confiscation of land from peasants, the 30,000 riots that go on throughout China every year because of the rampant crime and corruption outside of the glowing spectacles of Beijing and Shanghai, and the highly verified and documented fact that China is illegally harvesting body parts from Chinese prisoners and selling them overseas to foreigners who are willing to pay the astronomical prices these body parts command?

    I hope in future articles you find the time to address these issues, too.

    Best wishes.

    Lawrence Klepinger

    Author/CHINA HOUSE

  • Report this Comment On September 05, 2009, at 3:54 AM, cburgoon wrote:

    After living and working all over China for the past three years, with plans for several more years I have mixed feelings about the place.

    There is much to love and much to hate. But...I have to say it's obvious which way the trends are going in both countries.

  • Report this Comment On September 06, 2009, at 7:04 AM, bb2bob wrote:

    A s a native person of China,I want to say thank you for disscussing.But every contry could have many problems,including European Country and US.So I think China appears some problem like pollution and corruption should be logical,other country has too.

    According to my experience,the most important problem in morden China is ballance of growth of economy and nature.I also wish goverment see this and the fact is they have recognized at least.It has become the burden of Chia Goverment.As a yong Native I have also recogonised it.I'm working in a big iron and steel Company of China,so i'm having deeply feeling it.Please give us more time to solve it.

    Except the dark side ,It is interesting in China,especially for investor , businessman and traveler now!

    More foreigner come to China for bussiness.Russian,English,German and Italian often vist my Company for bussiness.Warren Buffett also invests Chinese Company BYD,He has seen the potential of Chinese company.China is becoming a International Contry not only in journey but also in bussiness.

  • Report this Comment On September 07, 2009, at 11:41 AM, sofpan wrote:

    China is the next super economic empire of 21st century.

    Whoever invests in China -I believe - he will see huge perfomances in 10 to 20 years form now.

    I have innvest in FXI (is an Exchange Traded Fund) and in some chinese companies with great potential (SDTH, CMED, TPI, APWR, WH) and also, I watch and I lice to buy HOGS and YONG.

    Also, I bought TTM (the Indian Tata Motors, that produces Tata Nano, the revolutionary micro car wich cost ~$5,000.

  • Report this Comment On September 08, 2009, at 1:40 PM, theHedgehog wrote:

    ds10 wrote: [quote]As stated in an above comment, " It all depends on whether China can keep a handle on their population growth."

    Isn't China already doing this with the "one child per

    family" program?[/quote]

    I believe they are, but I have read that there are some regions where they need more people (read unskilled workers, I think) so they are relaxing this rule. Whether or not it spreads generally is anyone's guess, but I'm guessing it won't. They already know what happens with unrestrained population growth.

  • Report this Comment On September 08, 2009, at 2:14 PM, alittlelost wrote:

    Great article. People should really visit China if they plan on investing. It is well worth it.

    Thanks, Sean. The skepticism is well warranted. Continual growth requires that they develop their markets and spur demand.

    Even if you can't go to China, check out this video about the world's largest mall in Guangzhou. Despite its size, it is largely empty. Consumerism will take a some time to take hold in China.

    Link: http://www.pbs.org/pov/utopia/

  • Report this Comment On September 08, 2009, at 4:45 PM, stonebusted wrote:

    Well the US is not the place to invest. China has it's problems. but it does not have unions and Democrats.

  • Report this Comment On September 08, 2009, at 4:56 PM, dividendgrowth wrote:

    China does have unions, and even Wal-Mart is forced to accept unions in China.

  • Report this Comment On September 08, 2009, at 10:39 PM, kblob wrote:

    I'm afraid that even if you visit China to "invest" , it is unlikely you will find out much.

    There is just far too much "background" information to be absorbed in a business trip.

    You will actually be surprised at how "professional" china law is, and it is actually strong in the areas of workers rights.

    Unfortunatly It's just not enforced.

    To understand China Business you really need to understand the unique difficulties and systems that underwrite the whole structure, a major problem is with education and trying to bring a massive number of people upto the required educational level to understand the responsabilities of a less controlled society.

    It is very easy to critisise China and the way they do things , but generally people that do this show a real lack of understanding of the difficulties faced by this country.

    And yes BYD is a company to watch , over 20% share price increase in the last 1-2 weeks, (but it will swing negative again soon)

  • Report this Comment On September 09, 2009, at 5:25 PM, murthg1 wrote:

    Thank you for a very thoughtful post.

  • Report this Comment On September 09, 2009, at 6:19 PM, ChicagoGrad wrote:

    First of all, fools getting ripped off in the big city is certainly not unique to Beijing or China. People that get ripped off in Beijing are going to get ripped off no matter where they go. In fact, I found the rip-off artists in Beijing to be very clumsy and easy to spot compared to Western confidence men. Of course most who feel they are ripped off in China simply don't understand the culture of bargaining.

    Another problem is with this authors remarks regarding the air quality in Beijing. I have pretty bad asthma and was expecting to have problems based on the propaganda from the West. What I found, was that the air quality is about the same as in Los Angeles...and later I found the scientific data to back up what my lungs were telling me.

    To equate the air quality in Beijing (or LA) to smoking is nothing more than hyperbole and blatant anti-China propaganda. Many Western scientists and research institutions are involved with monitoring air quality in Beijing, and their findings indidcate that Beijing's air quality is very similar to that of LA.

    A friend of mine worked for one of the major news organizations covering the Beijing Olympics. He said they always took their air samples from the worst locations they could find. One "reporter" was even laughing about holding the monitor up to the exhaust pipe of a bus to get a reading. My friend also said that they always got a wide variety of readings, but only reported the highest ones and ignored the low ones. Is that Western journalism's idea of fair reporting?

  • Report this Comment On September 11, 2009, at 6:58 PM, Origin97 wrote:

    If America is weak, wouldn't investing in our American companies help to make it stronger? Why send more money to China, even if it may have better growth potential.

  • Report this Comment On July 28, 2010, at 9:29 AM, whatsupfinance wrote:
  • Report this Comment On December 01, 2010, at 2:50 PM, TheSecretHistory wrote:

    If you want to make money off of China, invest in Australia, Germany, or Canada.

    As for the "political threat" of the PRC, I think it is overrated in the West and particularly America.

    @ChicagoGrad - Really, the air quality is the same in Beijing as in LA? I'm never going to LA, then.

    I remember walking past the entrance to the Wanfujing pedestrian area and being shocked at how thick the smog was - you literally couldn't see down to the end of the street. A Canadian friend of ours made us walk back just so he could take a picture of it. This was after we had been living in China for a few years, and had already become somewhat inured to the pollution.

    Remember too that during the Olympics the air pollution in Beijing had been temporarily lowered by banning large numbers of cars during the events.

  • Report this Comment On September 06, 2011, at 10:05 AM, sdcougar wrote:

    There is a very informative news video, "China's Ghost Cities" that everyone who thinks about China ought to watch.

    http://www.youtube.com/watch?v=pbDeS_mXMnM&feature=playe...

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