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China Hype Overlooks Investment Risks

By Denis Kleinfeld
Monday, 11 Jul 2011 08:07 AM Current | Bio | Archive

I am inundated with "expert" advice telling me and my clients that diversification into Chinese-based investments is the only way to limit risk and increase yield.

China, you and I are told, is the biggest and most important emerging market.

It’s a pitch that is hard to resist considering all the hype over China becoming the biggest economy in the world. Investment funds, giants of the investment world, and multinational corporations are just falling all over themselves to spend billions of dollars in all sorts of Chinese investments.

Not too many years ago, it was Japan that was the current investment flavor. Remember all the books, conferences, investment funds, leaders of multinational companies, and a plethora of experts, extolling us to emulate the Japanese. Japan was leading the way and we all were told that we had better get on the train or be left at the station. The experts made a fortune and the investors took a bath.

Later, everyone was encouraged by Wall Street to get on the high-tech bandwagon. It only took a few years for the investment and fund managers to rack up record profits and fat bonuses before the market crashed and the investors lost 50 percent of their portfolio value.

If nothing else, our investment advisers, hedge fund managers and corporate gurus are persistent. The next "gold rush" was an alphabet soup of virtually incomprehensible investment schemes.

CDOs, CMOs, and a whole host of investments that even the Ph.D.s and math geniuses who thought up these things up didn't understand what they had created out of smoke, mirrors and really bad government policy. Wall Street made huge profits, passed around bonuses that were staggering in amount, and the politicians behind all this got re-elected.

As before, the investors took a 50 percent loss or more of their portfolios.

Now we are touted on China.

There are some things that are inescapable. Let's just focus on one for today. China has a demographic time bomb as well as a perfect storm of the forces of nature.

The dramatic rise of the Chinese economy has been a function of their immense population, called by some as the "demographic dividend."

Expectations are that China will just grow and grow on into the future.

The problem is that what has been is no measure of what will be, especially when it comes to population demographics and its impact on a society and economy.

As of today, 20 years from now 80 percent of the population who will be in China are living there today. The China over the next years will be a much different China then the China of today.

In 20 years, the population of China will be, perhaps, only 4 percent larger than today. There will be fewer people under the age of 50 and even fewer in their 20s or 30s, various commentators have observed.

There will be, however, a vast population that will be in their 60s, 70s, and 80s.

Not only will the labor pool shrink but, at the same time, the population will be rapidly aging.

Yes, it is true that Japan has a graying population and a demographic problem. So does the United States. But Japan and the United States are already rich while China will have only half the per capita income.

China also has regional disparities that are irreconcilable. Its poorest regions are the ones that will have the largest grey population with even lower levels of per capita income. How will these people be supported?

If that isn’t enough, how will China deal with the fact that there will be 150 million more males than females? By 2030, 25 percent of the male population will be unmarried. What will be the social dislocation of so many males with no one to marry and have children? No country in history has faced this huge population of deeply discontented.

I recently read an article which observed that the demographic risks in China are, for the most part, largely unexamined and "un-priced."

There are a great number of readily observable risks, such as the forces of nature and natural resources that aren’t factored into the analysis of the risk when we are being sold on the benefits of diversifying into China.

It seems clear to me that those selling us on China have their focus on keeping up making staggering short term profits. When the bubble bursts, and it will, expect that Wall Street, our corporate leaders, politicians and the talking head gurus on television and in the press, will claim that they are shocked and surprised and certainly not responsible for investors taking staggering losses once again.

China is subject to substantial and unavoidable fundamental investment risks no matter who is promoting the glowing investment hype.

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Kleinfeld
I am inundated with expert advice telling me and my clients that diversification into Chinese-based investments is the only way to limit risk and increase yield. China, you and I are told, is the biggest and most important emerging market. It s a pitch that is hard to...
denis,kleinfeld,China,Hype,Overlooks,Fundamental,Investment,Risks
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2011-07-11
 

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