China investment is risky endeavor

by Stephen Butler

Seeing Gen. Douglas MacArthur in the Ken Burns World War II documentary that just aired on PBS, I recall that President Truman fired him when the popular general insisted that we attack China during the Korean War.

What was MacArthur thinking? Imagine the carnage today's documentary of war would have depicted if MacArthur had prevailed.

Apart from failed military adventures, China in the past was littered with the bones of American businesses that tried to do business there.

The temptation was so great. All those people. All that money. General Motors was one of the first of many companies in the early 1900s to run up against the rocks in that vast country.

Even today, the concept of intellectual property runs against the grain of a culture that assumes all knowledge to be in the public domain. Even its own Hong Kong movie industry has been driven to its knees by China's rampant pirating, and companies such as Microsoft struggle even though Bill Gates is treated like a deity when he travels there.

But someone has figured out how to make it work. Today, the world's most successful Ferrari dealership is the one in Beijing, so times have certainly changed. The mutual funds investing in China have doubled in value in a year. Compounded, investments in some funds have tripled since 2003. Talk about irrational exuberance.

The performance of one fund in particular prompted us to add it to our own company's 401(k) plan as an investment option. No sooner had we done this then I saw on CNBC the manager, Adrian Au, being interviewed. Remembering the heyday of the dot-com boom, a CNBC interview used to be the kiss of death. In the interests of providing investment entertainment, we're throwing all caution to the wind.

Who knows? Maybe this time it's different. We chose the Dreyfus Premier Greater China Fund that ended the previous 12 months with a rise of about 95 percent. Of funds investing in the Pacific basin, excluding Japan, it earned a five-star rating from Morningstar. In the past five years, its cumulative increase has been 364 percent. Year to date, it is up 70 percent, including a 20 percent drop in July.

Why would China offer such fascination as a high-risk investment candidate?

Well, there's China and everybody else. For less than 2 percent of my portfolio, it strikes me as an interesting gamble. If it increases by 50 percent, it adds an extra percentage point to my total rate of return. If it drops by 50 percent, I won't lose any sleep. After all, there are some natural cycles that persist in the investment world.

Typical stock market cycles occur every four to seven years, whereas real estate cycles tend to be longer -- in the 10- to 12-year range.

When it comes to a question mark like China, there may be a persistence factor that extends positive years out beyond the normal market cycles. Despite our world economy, countries create their own microclimate of investment cycles, which explains why Japan has seen a post-boom flat period lasting almost 15 years.

Maybe, thanks to what is known as investment "persistence," China's boom will extend and be the mirror image of Japan's long-running bust.

On the flip side, China has had a long history of banks that have failed. A healthy skepticism of financial institutions explains why Chinese-Americans prefer to invest in real estate in the United States.

Investing in China may be like accepting a ride with Mister Toad from "Wind in the Willows." We may get where we want to go, and we may get there fast, but we'll be hanging onto our hats.

Meanwhile, we can all thank Truman for the fact that we're investing in China instead of fighting there.

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