For My Conservative Friends Who Predicted the Collapse of China...

Here's a chart for all my conservative friends who insisted that China would collapse of its own weight. As a good capitalist, I want to point out what the market thinks.

The popular China large-cap ETF, FXI, is up 31% over the past year vs. 12% for the S&P 500. The Shanghai Composite Index

China Large-Cap ETF FXI China Large-Cap ETF FXI

 

Investors who bought the PEK ETF, which attempts to reproduce the performance of mainland-traded A-shares, earned 94% over the past year.

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I've been bullish on Chinese stocks since December 2012, when I announced that they had rung a gong at the bottom of the Chinese market. More recently, my colleagues at Reorient Group and I produced a slide show on the Chinese economy arguing the case for optimism.

Markets can be stupid. Markets can produce bubbles. This is not a bubble. The Hong-Kong traded Hang Seng China Enterprise Index is trading at just 9.5 times earnings after the big run-up, about half the multiple of US or European stocks. China is growing more slowly than in the past, at about 7% a year, but 7% a year means the economy doubles in 10 years. There are real earnings to be bought at reasonable valuations.

hscei

China is not going to blow up politically. Its financial system isn't going to collapse. China just scored the biggest diplomatic success in its history by persuading nearly 50 nations to join the new Asia Infrastructure Investment Bank despite US objections.

China might outstrip the West at innovation, as I argued in an essay for the British monthly Standpoint last September -- not because China is better than us at innovation, but because we have stopped doing what we do best. Anyone who doubts this should read Thomas Edsall's devastating indictment of the condition of American entrepreneurship in the New York Times. Think of it as the American hare and the Chinese tortoise. We're goofing off and China is trundling along. This should be a "Sputnik" moment for the US. We need to take back the technological high ground. Otherwise we will join Great Britain among the ranks of former great powers. It isn't baked in the cake, it isn't the inevitable result of some grand historic cycle, it isn't in our stars. We have a choice -- for the time being.

Related: For the counter-argument, Steve Green asks if we should be ‘Preparing for China’s Collapse’ at his Vodkapundit column.

 (Thumbnail on PJM homepage created using a modified Shutterstock.com image.)