February 10, 2005


Why are the Chinese moving their money out of China? (George Friedman, 2/10/05, Jewish World Review)

Once in a while, I run across statistics that seem unimportant at first, and then suddenly appear amazing. The Chinese government announced this week that Chinese investment overseas rose by 27 percent in 2004, to $3.6 billion dollars. Contracted investment — investment that has been agreed to but has yet found its way overseas — rose by 77.8 percent in 2004.

That seems like a statistic to yawn by, until you think of this: China's economy grew last quarter by over 9 percent. Everybody is talking about China's economy as unstoppable. U.S. investment bankers are scurrying to get their clients into China. Therefore, why would the Chinese be moving their money out of China? If all the forecasts are correct, and I lived in China, the only place I would be investing is at home.

There are two rules in investing. (Actually there are a lot of rules, most of them contradictory, but these two look good.) First, do what the insiders are doing. Sell when they sell. Buy when they by. The second rule is to never buy at the top — and you can tell the top when people who have no business investing are investing and the valuations become insane.

We said it was time for a recession in February 2000 based on two things: Yahoo had developed a larger market capitalization than General Motors, and my wife's hairdresser had gotten seed money from a venture fund for software for scheduling beauty salon appointments.

Last week I received a spam e-mail from a group telling me that it wasn't too late to invest in China and they had several exciting opportunities they wanted to discuss with me — or anyone who'd listen. When the e-mails for enhancing various functions become mixed with e-mails for not missing the last boat to China, it is time to be careful.

One of the classic idiocies of the Japanophobia era was: "they're buying America!" What other nation is worth owning futures in?

Posted by Orrin Judd at February 10, 2005 10:53 AM

But - are they putting their money here?

And found this at Econopundit:

UPDATE II: Still no answers to the above question, but Dave Schuler (The Glittering Eye) adds this:

[The] Chinese know as well (or better) than we do that the Europeans do not have free trade in their hearts. For that reason the EU is just not a good candidate for closest trading partner for the Chinese. So why [would they ever] adopt the Euro and deal a severe injury to us?

Posted by: Sandy P at February 10, 2005 11:35 AM

The PRC may have hit a highwater mark. First, the legal system does not protect intellectual property rights whatsoever. That used to be a cheap way to jumpstart their manufacture but if they are ever going to have serious domestic R & D they have to protect their own labs. Otherwise, the scientists and engineers whose work is completely portable will go elsewhere. Second, there are huge centrifugal forces in China. Development is incredibly uneven and the various functionaries in the Army are heavily involved in specific enterprises. General A might want to get tough with America or Japan, but General B is more concerned with his jeans factory profits from Wal-Mart than with Chinese muscle-flexing. Also, the bigshots in China take care of their regions, e.g. Szechuan was a beneficiary of local-boy-made-good,Deng Hsiao-Peng.

So the smart money is fleeing. They are hedging their bets. And we should be surprised?

Posted by: Bart at February 10, 2005 11:43 AM