Wednesday, September 3, 2008

Book Review: From Wall Street to the Great Wall

Book Review: From Wall Street to the Great Wall
Filed under: General
Posted by: site admin @ 9:17 am

Burton G. Malkiel and Patricia A. Taylor with Jianping and Rui Yang: From Wall Street to the Great Wall - How Investors Can Profit from China’s Booming Economy, W.W. Norton, New York, 2008, ISBN: 978-0-393-06478-0 (hardcover)

This book is intended to help investors to take advantage of one of world’s fastest growing economies that is also emerging as a potent super power with more political, social and economic control of itself than any other. Hardly has any other nation of even one half of China’s size, either in terms of population or geographical area, had such a linear whoosh of a growth, sometimes at a blistering 15 percent per annum in GDP. The book under review brings out the salient features of China and its emergence as the fourth largest economy in terms of nominal GDP and the second largest in terms of Purchasing Power Parity. It attracts the “largest amount of foreign investment of any nation making it a magnet for venture capitalists and others seeking to capitalize on the country’s booming economy.” The sudden transformation in about forty years from a most hostile to a pro-business state is explained captivatingly in the book.

The principal author, Burton G. Malkiel is the Chemical Bank Chairman’s Professor of Economics at Princeton University. He has also been a member of the Council of Economic Advisers and has served on the Boards of investment and finance companies such as the Vanguard Group and Prudential Financial Corporation. He is also well qualified to write on investment opportunities in China by virtue of being the author of the periodically updated and informative A Random Walk Down Wall Street. The other authors have either collaborated with the principal author or have had similar experiences.

Anyone familiar with the contents of Pearl S. Buck’s Nobel-prize winning book “Good Earth” knows what an awful opium den complete with all social evils China was till the 1950s, with several European nations having colonies on mainland China. Willy-nilly, to the credit of the Chinese government it must now be said, that hundreds of millions of poor Chinese have been lifted out of poverty. China ranks amongst top super powers of the world today commanding notice and consideration from everyone. Malkiel et al list the “stunning accomplishments” such as the $1.5 T surplus or reserves that they can wield to buy any asset anywhere, unquestionable control over its populace and resources ( unlike the Soviet Union, on account of which it crashed), plans to send lunar explorers and staging the Olympics this August in Beijing and the World Expo in Shanghai in May-October 2010, the very first such in a developing country, largest consumer of wireless phone services, coal, steel, cement, metals and scores of other items. Thanks to the embrace of an open economy and a high savings rate such as almost 50%, China has become one of the largest markets, if not the largest, for most luxuries from Bentley limos to Armani suits, cosmetics, Bordeaux wine and golf.

To the discerning observer, while the positive features of economic growth are too conspicuous, the negative aspects are no less striking. The sacrifices that the Chinese people have made for this prosperity, particularly under “Mao’s extreme economic policies”, are too large to be enumerated, including in terms of loss of democratic freedoms and of course loss of life itself. To this must be added the costs in terms of quality of life, environmentally dreadful conditions, high toxicity in food and water, and even in toys and other items. It is sad commentary on the state of public health in China that the US Olympic team is planning to carry 25,000 pounds of lean protein food to Beijing to avoid local contaminated or tainted food.

Malkiel and his coauthors deny that China would trip over any road blocks and obstacles such as its demographics of aging population, bad bank loans, tensions with Taiwan, Japan, India and others, environmental degradation, continuing poverty in particular in the Western provinces, inflation, unbalanced and unsustainable growth, and so forth. In their preface Malkiel et al even surmise without evidence, that “…there is no question that China will shortly surpass the United States and once again become the world’s mightiest economic power.” They state more categorically in their summing up (p. 294) that “…even if growth rate slows, it will be the largest economy in the world by the 2020s, as measured in terms of purchasing power.” In an earlier ICA Institute blog (Chindia Biz) we have extrapolated available data to prove that this cannot happen short of discontinuities in America’s growth.

What the book is strong in, is the analysis of the Chinese stock market and opportunities for investment. While the stock market is not efficient, it is becoming less so more recently. They describe A-Share markets that are exclusively for Chinese citizens and are inefficient, and H and N Share markets that are open globally and are somewhat efficient. The Price/Earnings ratios for Chinese companies were more favorable than for American companies, as were (P/E)/Growth Rates (PEG), in the latter case hiding the potential for making a rewarding buy if such a PEG were below 2. They also identify the broad categories of investment such as stocks, bonds, real estate securities but also mutual funds and their earning records. The Book has information on different indexes such as the Hang Seng, MSCI Hong Kong Index and the FTSE/Xinhua China 25 Index. In the last Chapter the Book offers “The Optimal Investment Strategy” for relatively small and large investors, including all Exchange Traded Fund Portfolio aimed at making the best of rapid Chinese growth.

The Book is somewhat exuberant about China and not all of that is justified. But they are quite right to advise that “no well-diversified investment portfolio can afford to ignore the investment opportunities that China offers.”

Psst!…..Here are some investment tips the Book does not give, but the book reviewer collected on his own! Almost $500 billion is being spent to clean up the air in Beijing, the venue for the 2008 Olympics, and any air, water and environmental cleaning company can bag business and go for them. Also go for metal, oil, electric, electronic, security surveillance, travel and related businesses: Chalco, Security and Surveillance Technology, Petro China, Baidu (China’s Google), Terra Industries, and China Eastern Airlines, and others are reporting gains of over 100 per cent.

S.V. Char
Editor of Academic Resources

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