The Investment Scientist

Is China a big bubble?

Posted on: April 1, 2010

What a difference eighteen years have made.

Eighteen years ago, I was awarded a scholarship to study mathematics in the U.S. The China I left behind was very different from the China of today:

  • Then there was no private ownership of automobiles; now China boasts the world’s largest car market.
  • Then there was no private ownership of houses; now there is little public housing left.
  • Then China had a grand total of 28 kilometers (17 miles) of expressway; now China’s expressway network is second only to the U.S.
  • Then there was no high-speed train service to speak of; now China has the fastest high-speed train service in the world covering the equivalent distance of New York to Chicago in three hours.
  • Then China’s economy was the 13th largest; now it is the second largest.

As I visit China, on the one hand, I can’t help but marvel at the changes, especially the speed of change. On the other hand, I am truly puzzled about how this could all have happened under a communist government.

Consider these facts:

  • China does not allow the free flow of information.
  • China has weak protection of private property rights.
  • China does not have much of a legal system to speak off.

If you read economics 101, these are the preconditions of economic development.  Either the economic principles that we in the West are familiar with are not true, or China is really the mother of all bubbles that is waiting to burst.

What do you think? Leave your comment here.

Tags: ,

19 Responses to "Is China a big bubble?"

Wouldn’t this mean that they have the ability to create value even further?

If it is value, then we investors want to be part of it; if it is bubbles, we want to stay away.

Only Michael Zhuang can tell us what to expect in China. I’ve never been in China.
Here in Italy we have an ancient proverb I try to translate in this way: “What very-quickly rises, meteorically plunges”. But the case of China could be different. Indeed China has always been a great economic power for thousand of years. Its low profile in the past century could have been a modern anomaly only, and this development the coming back of an ancient status, not the appearance of something new. Hence in the long run I guess China will maintain the prominent, just regained, international economic role . But some numbers are… too much. 50% real estate prices increase in a year is too much. I would not be surprised by a new leg of the bear market caused by a Chinese tumble.

It simply says that the love of money and the greedy quest for material wealth we see worlwide transcends Political ideology.



Many more important things in life have been sacrificed at the alter for the sake of more and more money, why not the lofty ideals of socialism communism and democracy.

I’m questioning if it is a bubble or not. It seems that once China puts these things in place:
China does not allow the free flow of information.
China has weak protection of private property rights.
China does not have much of a legal system to speak off.

they could have even further growth.

Very interesting topic. I’m not an expert in economics or finance. Here are just some thouhgts on your article.

It could be that economics 101 principles are true, your statement may not:
— The flow of information may not be 100% free, but it is there.
— If comparing with US, the protection of private property rights is weak, but could it be enough for China’s growth now?
— And how much is “much of a legal system” to speak of? China does have its legal system, right?

Or the principles need modified to fit today’s world business and economics. When were those principles created, half century ago?

Anyone can make any prediction, not a crime, right? Only the fact tells if it is ture. Being a non-investor, I’d like to wait and see the fact. As an investor, just take the risk: whether you believe it is true or not.

China is a bubble. Oil stocks are depleting. Without oil, almost everything stops, both here and in China. China holds America’s debt. When America inflates the dollar, that debt loses value. China supplies all of our consumer goods. When Americans cannot afford consumer good (like all those people shopping in thrift stores right now) China’s market declines. America still is the largest market, and China and America are inextricably linked. When America collapses (and it will with this crushing debt) China will follow soon after. If I were in China I would be stocking up against the next government crackdown, which is sure to follow after the economy implodes and leaves Chinese holding the bag.


The Italian proverb you mentioned has an equivalent in both my native country China and my adopted country the US, I guess that wisdom is universal. But even with the help of ancient wisdom, I can sense you are not sure whether China’s rapid rise is an anomaly or simply returning to normal. This is a million dollar question for my clients and honestly speaking I don’t have an answer yet.


Indeed, China can’t be honestly called a communist country. It has more similarity to the old right-wing dictatorial regimes in South Korea and Taiwan.

Non Economic Thought

Very interesting insight, I have to agree, even flow of information and protection of private property rights are way better than 18 years ago when I left. In fact, private property rights were not recognized in China’s Constitution then, at least they are recognized now.


I don’t think oil stocks are depleting. Maybe oil stocks that can be excavated at virtually no cost are depleting, but there are plenty of higher cost oil stocks. Technology advancement will bring down the cost of excavation as well as the efficiency of oil consumption. I am not worry about that at all.

Interesting report on china perspective. I agree, its sometimes referred to as the “china model”. every time I’m there, I’m fascinated by the progress and the points you make…

At one time I’ll bet Europe looked across the ocean and thought America was a crazy bubble… Freedom and market reform in China will come with time. 30 years from now do you think china will be a larger or smaller economy? Capitalism has taken hold in china, I’m betting on long term growth…

You make some great points. I remember when we thought Japan would own all America Real Estate.
China does not allow the free flow of information is a scary situation. Also what would happen if (I know, slim chance) if the Chinese Currency was revalued?

Bubbles are created when people speculate based on the assumption that there will be a greater fool to buy from them. The bubble burst when there are no more fools left. Dutch tulip was such a bubble. Japanese real estate when Tokyo palace was worth more than all of California was another. Securitized sub-prime mortgage created by Wall Street is the most recent example.

An unsuccessful lawyer in New Jersey turned prognosticator predicted the collapse of China almost ten years ago. He is still waiting for vindication, along with many naysayers that followed. The reason these would-be seers have been wrong is not necessarily that they are lousy economists–they may be that– but they got way too emotional about the issue. They think the American model is only the only successful one over the long haul.

China has so far proven them wrong and will likely to continue to do so. And certainly whether the American model continues to be the guarentee for success is subject to question.


It’s great to have someone of your caliber comment on this subject. China’s example really opens a whole can of worms for practitioners of the dismal science. I have a nagging doubt that the economics that I learned is simple a human attempt to explain the one economic success up to the time – the Western economic success. However, whether China provides an alternative model is still too early to say. China has a good 30 year run. Will China have another good 30 year run? I am not so sure.

By the way, I visited your blog, it provides a great deal of information on many subjects of interest. Good job!

I respectfully suggest that the question of China’s economy being in a bubble or not is irrelevant. When you have the three facts stated above by Mr. Zhuang:
” * China does not allow the free flow of information.
* China has weak protection of private property rights.
* China does not have much of a legal system to speak off. (sic)”
then any of your investments are all made at a huge disadvantage.
Forget “bubble” vs. “no bubble” when the economy is what the leaders say it should be.
Indeed, I would argue that investing in any country that has these three factors is in reality pure speculation undertaken with huge risk to the speculator. How can anyone perform due diligence when investigating an investment beforehand if there is no or poorly verifiable independent source of financial information with little recourse in the courts if one finds out later that the information upon which one based an investment decision happens to be wrong or entirely made up. Even with a best case scenario later on, your ‘wise’ investment may go up tenfold only to be…
– taken away by a better connected individual (weak property rights) with no recourse in the courts (poor legal system).
– hidden / stolen from you as a paper loss (low information flow).
– seized by the state as a vital industry or taken over by a Party-owned holding company (weak property rights).
– entirely fictitious (low information flow).
This is not a country in which I would invest; vibrant, booming economy or not. The same holds true for any other country run by a oligarchical dictatorship that censors its media and fully controls its courts. Russia quickly comes to mind as another pseudo-capitalistic country where I do not wish to place my bets. No offense meant to Mr. Zhuang or any other person of Chinese descent, but China may be freer in appearance than 30 years ago, but it is not free. In the US, you get the best legal system that you can afford (more $ = slicker lawyer = better judgment), but in China, being well connected simply means that you will win without even the excuse of a weak legal precedent. [Note: being cynical does not mean that I am wrong.]


I don’t take offense by your comment at all. I agree with much of what you said about investing in a country with weak protection of property rights and non-free information flow, China or not. As a financial advisor, I help my clients have exposure to China (most of them like to have that) without actually putting money inside China.

That said, is it surprising to you that China has been either the biggest or the second biggest destination of foreign direct investments? On top of that, domestic private capitals are by and large not freeing the country as well. Are these capitalists out of their minds, and for 30 years?

I am not saying that people who invest in China nor people living in China who happen to invest are out of their minds. I am saying that I think it is incredibly risky to invest money in any country that has those three set of conditions hostile to an honest investor, making it speculation rather than investing. By all means, speculate if you so desire, but go in *knowing* your risk and expecting a proportionate return. I choose not to do so. Personally, I’ll happily invest in businesses that do business with China, but not China, yet.
I am glad that some people invest or speculate in China. Capitalism is a great way to advance financially; indeed it may be the only way for us to do so given human psychology. I have met many and work with several very smart Chinese people. Capability and integrity are race-independent (race being essentially fictitious, according to genetics). I just think there is a big distinction to be made between the Chinese people and the Chinese government, whose interests are clearly not aligned.
Communism and socialism are wonderful sounding experiments that simply do not work for people. In the US, regulated capitalism has turned into much less regulated corporatism, which are not equal. The balance has to shift back with some more regulation, or else the general population will suffer. No matter what your social system, see my comment above in re human psychology. You will never lose money betting on human greed and selfishness, to paraphrase badly an old quote.
Getting back to your “out of your mind” comment, what makes you think that the financial speculators who ran Lehman Brothers into the ground, and who currently run Citibank, BofA, and both Goldman Sachs and much of our Treasury Department & Fed are operating on a rational basis? They may not be crazy, but they are not using a real science, making them wishful thinkers. I firmly believe that economics is a rather crudely applied form of human psychology that happens to use numbers, not science. If it were science, then economics would have testable hypotheses that work instead of rapidly changing models that go in and out of fashion and crash badly every few years. Economics has a long way to go to be called rational or science. Make your own conclusions about whether or not people who practice economics are rational. After the huge CDO bets that killed companies, I know where I stand.
That said, I invest in (1) a broad range of stocks, because that works most of the time even for a financial dummy like me, and (2) real estate, because stocks don’t work all of the time and everyone needs a place to live. I also own my own home, in case bets 1 and 2 fail spectacularly just when I need them the most. Insurance is for the failure of 2 and 3, though I’m not sure it will help if everything goes crash at once. Sorry for the wild digressions, but that is where my mind took me.


My “out of your mind” comment was not meant to challenge your comment, it was meant to provoke some thinking about a phenomenon that does not gel with expectation. In fact, my logical framework is very similar to yours, that’s why in my original article I wrote I am puzzled how could China have gone so far.

Some have suggested to me that I should package myself as an expert who can help clients get rich invest in China, but writing a book for example. I could easily find a ready market for my message. In practice, I have steered people away from investing in Chinese stocks, for precisely the reasons you mentioned. Marketing myself is secondary to ensuring the my clients don’t suffer from risks they don’t see.

One thing I do disagree with you is a statement you made in your previous post where you said: “China maybe freer in appearance than 30 year ago, but it is not free.” I think freedom is not black and white, it has many shades of gray. I believe China would not have come this far without real expansion of domain of freedom. Clearly it is not free enough, at least not for us who are used to the freedom in the US.

In the US if you work for a big corporation, your internet access is firewalled in, your email communication is monitored, your freedom of speech is limited, your boss make all the decisions and you don’t get to have a say. I found the Chinese state is very much like a big US corporation. When I was in China, I have asked a successful businessman if he has to pay bribes, how he knows whom to pay and how much to pay. You know what he said? He said he let a professional firm take care of that. Sound like to me he has hired a lobbying firm. I had the feeling the distinction between China and the US is smaller that we thought. It’s not stark black and white.

We may be closer in thought than you believe. While I agree that Chinese people are more free than 20 or so years ago, that freedom is still tentative and can be revoked with little notice by the political system. That is not true freedom.
Unfortunately, we also agree when it comes to freedom in the U.S. Businesses may not pay illegal “bribes” here, but I fail to see any real distinction just because they are called technically legal “campaign contributions” using “lobbyists”. People working for corporations are not free when they are monitored or are afraid to speak up about illegal activities, whether in fear of retribution or simply loss of income. The same holds true for federal or state employees, whose communications are explicitly monitored. Don’t get me started on the loss of civil liberty engendered by the so-called “Patriot Act” or civil forfeiture laws. While I consider myself an American patriot, which word has gone out of favor, I feel that my country has many flaws and problems that can and should be be corrected.

The fact of the matter is that you’re generally looking at China’s GDP. Roughly being the value of all goods and services produced in that country — it is composed of profits by a significant number of foreign countries. For a better picture, one ought to look at the median income. An aside: Consider their lack of patent protection.

China has a growing middle class — but it is still small. Its population is aging rapidly and its working class is shrinking. Thanks to the one child principle in conjunction with cultural bias towards having boys you see a highly distorted distribution of men to women. Clearly this will have an impact on China’s future.

Economically, it is unnatural to have only growth. I dare say it is impossible. The business cycle naturally requires growth and decay. It is the natural order of things. The only exception seems to be made when there is corruption (i.e. GM). Governments still haven’t learned that printing currency won’t solve any problems if people don’t have faith in its value. History is littered with countries who tried to print/devalue their currency since even before the Roman empire.

I don’t agree with any kind of assertion that democracy is best for capitalism. On the contrary, I’d argue fascism is a much better forum to promote business interests. Not as much fun to live under for the middle and lower class however 😉

China has significantly more to worry about:
typically in histories countries which have found themselves in similar circumstances either suffer from:
a.) civil war
b.) external war
c.) spread of a disease
d.) some combination of the above

Check your history — empires which grow and expand are filled with these examples. Even the USA, only 200 years old has had its fair share.

When you have scarce resources in capitalism the resources generally go to the highest bidder. In other forms, it goes to those who are politically connected. Either way, the poor get screwed. What happens to middle class?

The middle class are the backbone of a thriving democracy.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s


Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


%d bloggers like this: