The Great China Story

The benefit of hindsight that provides clarity in an analysis today of Starbucks isn't there for China, at least not yet. But if you were to open your mind and look past today’s cheery newspaper headlines you’d see that China is suffering from a severe case of LSGO.

Ten for ten: Since 1998 its GDP has grown at about a 10% annual real growth rate, and its economy more than tripled in size (in real terms). There were no recessions, just expansion – the Chinese miracle growth? The origins of China’s tremendous growth are well known: A large population migrating from lower productivity (farming) to higher (manufacturing), cheap labor, a more capitalism-friendly communist government, and insatiable demand from the US and the rest of the developed world for cheap goods.

Unlike Starbucks -- a private enterprise that has free market principles deeply inbred in its DNA -- China is a communist country. Though it is moving towards free market capitalism, it isn't there yet. In my opinion, the rule of law is weak, the country is infested with corruption, and due to central planning and tight government control of the banking system capital is often allocated based on cronyism (or political relationships), not merit.

Prolonged high growth in this environment results in inefficiencies that are compounded year after year. In other words, though the growth is high, the quality of growth is low, thus asset allocation decisions are likely to be poor. The ten year super-high growth marathon put China at high risk, actually more likely of a certainty, of a severe case of LSGO.