Nearly four years after the crash, the market value of China's economy languishes at around half its January 2008 level, while the American stock market has recovered to almost 90% of its pre-crash peak. Why should that be the case, when China is growing at 9% a year and America at 2% or 3%, with an administration hostile to business and the world's highest corporate tax rate?

A simple answer is that it is safer to buy the stocks of American companies that sell to China than to buy Chinese companies. The world learned in 2008 that even the freest and most transparent large economy, the United States, might crash due to the negligence and cupidity of regulators, congress, ratings agencies, and financial institutions. Without an open and rambunctious democracy that responds to errors and corrects them in the full light of day, modern capital markets don't work.

Another way to gauge China's problem is that its gross domestic product (GDP) quintupled over the decade through 2010, while its stock market doubled - so that market capitalization has fallen sharply relative to GDP. The value of Chinese companies represents a much smaller proportion of the Chinese economy than it did in 2000. America's stock market is worth roughly what it was a decade ago, while nominal GDP is half again as much. The ratio of market capitalization to GDP also shrank in America, but not nearly as far.

America has had its share of corporate fraud, for example, WorldCom and Enron. But investors by and large trust American corporations to report their earnings accurately, with the exception of the banks, who are a long way from recovering trust. China still looks like the Wild West to overseas investors, and not without reason: China is a great leap away from Western standards of governance and rule of law.

Growth is not a small consideration: if you put $1 into the Chinese market in January 2000, you would now have $2, but $1 invested in US stocks would still be $1. What is troubling is that just three years ago, the Chinese investor would have had not $5, but $2.

The risk to China is not a hard landing, but complacency about the country's visible success. China has accomplished the largest migration in history, and continues to shift nearly 15 million people a year from the countryside to cities. Its demographic problems will not impact the economy for two decades or more, because so many of its people are moving from rural poverty to urban productivity.

Although the overall Chinese population is poised to decline, the absolute number of Chinese engaged with the world economy will continue to rise rapidly for some time. And the present generation of university graduates, for all the deficiencies of tertiary education, is the largest, most qualified and most ambitious in Chinese history.

If China fails to promote fertility, though, the aging and eventual shrinkage of the population will pass a point of no return around 2040. The proportion of elderly dependents will jump to 40% in three decades, which is difficult but not impossible to manage; but unless China regains replacement fertility well before then, the elderly dependent ratio will rise to 60% by 2060, and the Chinese empire will implode.

David Fuller's view This is a 'feel good' article written by an American, mainly for an American readership, although sufficiently interesting for Asia Times to also publish it.

Regarding the section reproduced above, veteran subscribers know that faster GDP growth does not necessarily mean a better stock market performance over the medium term, which I will define here as anything from several months to a couple of years.

Supply is extremely important and China has floated more that twice the amount of new equity in the form of government held and previously untraded shares over the last two years, mainly to strengthen its banks, than we have seen from the USA. This new supply has weighed on China's considerably smaller stock market, although the value of its total capitalisation is growing more rapidly than the US market. Supply for a number of US equities has also decreased due to share buyback programmes.

The article also overlooks data confirming that the fastest growth region for America's most successful multinational companies - the Autonomies which Fullermoney likes - is in Asia.

The article's headline mentions Asia but the copy only discusses China. The ASEAN stock markets have outperformed, not least because they have experienced a much smaller increase in supply.

Monetary policy is also a hugely important variable in stock market performance. Until very recently, Asia had been raising interest rates to curb inflation. In contrast, the US Federal Reserve has persisted with a radical monetary stimulus.

The article did not contain many specifics regarding China's graduates but many gain advanced degrees from the west's top universities, including members of the government. An increasing proportion of these overseas Chinese students now return to China because job prospects are often better. Lastly, China and Asians in general score very highly in the International Mathematical Olympiad (scroll down to see country rankings).


Lastly, the opening section of the article, extrapolating trends on university graduates through to 2100, is fanciful. Such data on socio-economic trends is seldom accurate because conditions do not remain constant.

In conclusion, China and all other Asian countries will experience periodic economic problems, just like the rest of the world. However, from an investment perspective, I wish to have a significant proportion of my personal long-term capital in the world's fastest growing economies. The best time to establish these positions is when they are out of fashion and trading at competitive valuations, as we see today.

Meanwhile, the Autonomies have been runaway outperformers over the last year or more, confirming that the best way to play China is sometimes by investing in countries and equities which supply what the PRC wants.