It is easy to find reasons why China stocks are a smart play when the rest of the world seems in the verge of recession. Many articles are published every day that encourage investors to consider putting money into the Celestial Kingdom. Yet there is really no such thing as a no-brainer investment vehicle. People need to understand the reasons why they make any investment decision whatsoever, no matter how foolproof it appears to be on the surface. Before taking the plunge, it may be wise to examine what an avocatus diaboli has to say about investing in China stocks.
To begin with, China is a nation heavily dependent on exporting manufactured goods to the rest of the world and, according to the central government’s own figures, needs to maintain an average growth rate of 8-9 percent just to absorb the number of indigent rural workers streaming into the cities every year. With all of China’s large primary markets either on the verge of recession or actually in one at the moment, it is hard to imagine a way in which Chinese exports can climb 9 percent without some seriously creative bookkeeping.
Next, China has reputedly invested large sums into shovel-ready development projects as a way of kicking up internal growth to take up the slack in export growth. Yet news reports are always pointing out the existence of highways to nowhere and empty cities. What this means is that China is in the late stages of a huge real estate bubble very reminiscent of the one that crushed the American economy. Projects are not being built because they are in demand, but only because it is still possible to get them financed. China’s real estate and construction industry is essentially building white elephants for no purpose other than to create cash flow in the hopes that real demand will eventually recover in time to save them from bankruptcy.
China remains a one party dictatorship with an unreliable justice system and a restive populace that undertakes tens of thousands of violent riots every year, a trend that is on an upward march. Every few months a western businessman is charged with some form of espionage, and dissident Chinese nationals disappear on a regular basis. The profits of many China stocks depend on extensive theft of intellectual property, a deliberately undervalued currency, and a horrific lack of concern for industrial pollution. Putting an end to any one of these economic pillars through concerted international action will devastate corporate profitability. These factors need to be taken into account before anyone invests in China.