Taking Stock / Chinese Food for Thought

Mr. Businessman, have you visited China yet?

No? You didn't join Olmert's delegation? Or the Export Institute mission? Or the venture capital junta? Too bad. But at least you can talk eruditely about China's potential over coffee.

You can't? Hmm. Sir or Madam, you are out of the loop. Shame on you! China is the hottest subject in town and if you aren't considering doing business there, you're so out you're invisible.

Here are some key words to jump-start your Qinghai kaffeeklatsch. "Astonishing, astonishing." Or, "Consider the potential!" You always have, "It isn't a billion, it's a billion and a half," or "their foreign currency reserves, oh my Lord..." If you really want to seem on top of things, you could offer, "Did you read yesterday that foreign investment in China is greater than in the U.S.?" and wrap up with another, "Astonishing, astonishing." You might want to provide the appearance of proportion by cleverly adding, "Scary, isn't it."

No question about it, China is the most interesting place in the world right now. Its economy is growing at frightening speed, it is awash in foreign money, the world markets are awash in Chinese products, manpower is horrifyingly cheap, quality is improving, and each and every week some new eye-popping story about China hits the business pages.

But then go talk with all those Israelis who hastened to jump on the Beijing bandwagon and invest in the "China" mutual funds that on-the-ball Israeli brokers were hawking.

They will tell you something strange: China continues to occupy no small part of the business pages worldwide - potential potential and again potential - but the value of their mutual fund holding keeps shrinking. Some of these Sinofunds have lost 5 percent, others almost 15 percent.

Here are a few more facts about China that for some reason tend to escape the press's notice.

l The Chinese government's macroeconomic policy is based on foreign investment being the main tool to develop the nation. That strategy has advantages, but also entails grave risks. If foreign money leaves China, the pain could be great.

l Many economists warn time and again that China's national balance sheet is inflated or falsified outright. Some believe a lot of that foreign investment is actually Chinese money sent to Hong Kong and repatriated for tax purposes.

l China is one of the most corrupt countries in the world. It is 66th on the Transparency International list of rotten countries. Far above it are "luminaries" of probity, such as Cuba, Saudi Arabia, Jamaica, Latvia, Peru, El Salvador and Colombia.

l China suffers from horrible environmental damage that just gets worse from year to year. No less than 20 percent of Chinese deaths each year are caused by pollution.

l China's population is tremendous, but its agricultural lands are not. It has less farmland than India and its population is 30 percent greater. The result is a constantly growing shortage of food. It imports huge amounts to make up the balance.

l China's banking establishment is bankrupt, but the government won't let it collapse. Most of the loans, amounting to a quarter of China's gross domestic product, are as dead as Peking ducks. They will never be repaid.

l China's economy is growing, yes, but only one part of it. China actually consists of two nations. The villages contain 900 million people and live in abject poverty, with annual GDP per capita of $900. Along the coastline live another 400 million people averaging annual GDP per capita of $4,000.

Unarguably, China is the most exciting thing in today's global economy. But Westerners enchanted by its cheap products and the anticipation of business opportunities galore tend to overlook a few things. One is that the country is a giant jobs vacuum. Countless millions of Americans, Mexicans, Japanese, Europeans and fellow Asians will lose their jobs to the giant factories being set up in China.

At the end of the day, transferring manpower to China will improve the global economy. Each country should focus on its comparative advantages. But that will be cold comfort to the millions of people outside China who find themselves reduced to abject poverty after having lost their jobs.

No less important, it isn't only the plant workers who will lose their livelihood. Going by history, the foreign investors haring for Beijing and Shanghai will lose their pants, because they don't know the rules of the game over there, or because the rules will change too fast for them to follow, and they will learn of the changes too late.

Seven years ago, Russia was the hot story in the investment community, and in 1998 it went broke, wiping out all the foreign investment within a year. Russia is now growing again and is again attracting a wave of foreign investment that is fated to wash over China, too. Your job is to make sure that when you go to China, your timing is right.