R ight now, investing
in China is hotter than a pot of green tea. Sure, Morgan Stanley Capital International's
China stock index suffered a 9% setback in mid-April,
but it has still gone up 72% over the past 12 months.
In January and February alone, some $320 million poured
into U.S.-based mutual funds invested in China. The bullish
case for China seems irresistible: a stable government,
millions of aggressive entrepreneurs, plenty of cheap
labor and 1.2 billion consumers eager to fulfill a lifetime
of pent-up demand. But don't be blinded by hype. Here
are the important questions:
--HOT OR OVERHEATED? China's economy grew 9.1% last
year, nearly triple the U.S.'s rate. China's demand for
raw materials such as oil and steel is insatiable, and
companies are ravenous for bank loans to finance their
expansion. China's central bank boosted interest rates
in April, but there's still the risk of an explosive
burst of inflation that could cripple economic growth.
Even if inflation remains in check, says economist Donald
Straszheim, China is likely to face severe blackouts
as its inadequate electrical grid struggles to supply
enough energy to power the economy.
--FAR EAST OR
WILD WEST? "When you're in China," says
Hhu Ng, a portfolio manager at the Cundill Group in Vancouver, "you
fear for your life sitting in a cab because there's no
regard for traffic laws. How much confidence should you
have then in China's business laws?" Not much. Corruption
is rampant, copyright and patent piracy is a way of life,
regulation of the financial markets is murky, and Chinese
accounting standards could turn the con men of Enron
and WorldCom green with envy. What's more, the Chinese
banking system is dominated by the government, with loans
tending to go to political cronies, state-owned companies
and other iffy borrowers.
--GROWTH OR VALUE? Riad Younes of Julius Baer International
Equity Fund warns, "When everybody's excited about an
investment idea and everybody's chasing the same goose,
nobody ends up making money." That's because the return
you get out of any investment depends not just on its
future growth but also on the price you had to pay to
get in. And the Chinese stock market, at least for now,
is dangerously overpriced. There's nothing wrong with
having an indirect stake in China through a diversified,
low-cost foreign fund like T. Rowe Price International
Stock, Vanguard Total International Stock Index and the
global fund that Younes runs. But buying Chinese stocks
or a China-only mutual fund could give you a scalding
if the teapot suddenly boils over.
You can e-mail Jason, a money columnist, at investor@moneymail.com
—
With reporting by Carolyn Bigda
From
the May. 03, 2004 issue of TIME magazine
http://www.time.com/time/magazine/article/0,9171,1101040503-629372,00.html
