China: To Fret or not to Fret?

By Eric Jackson
RealMoney Contributor
5/21/2010 1:45 PM EDT
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I've spoken often of my bullishness on China over the last few months. This is based on my read of its shift from an export-driven economy to a domestic demand-based economy, the government-fueled growth in infrastructure and the emergence of 200-800 million middle-class Chinese over the coming 10 years (depending on whose estimates you believe).

I firmly believe that China is an unstoppable economic force in the world and nothing about the market gyrations of the past couple of weeks have swayed me from that view. Unlike Europe or the US, China has financial flexibility (in terms of a clean balance sheet) and enormous economic growth potential. That can mop up a lot of non-performing loans if it needs to.

Arguing the pro-China point of view, however -- and disputing some of what I think are false, or off-base conclusions by those with a bearish view of China -- means that I don't often get a chance to discuss some of the potential risks I see in the country. So here are some of the things I worry and don't worry about.

I am not losing any sleep about the property market in China's Tier 1 cities (Beijing, Shanghai, Shenzhen and Guangdong). China basically didn't have a property market until 1978. It was controlled by the Communist Party. From 1978 to 1998, some property transactions occurred, but they were mainly for state-owned enterprise building (for example, large apartment complexes). It was really only around the turn of the century that the government allowed Western-style property transactions to happen. Even still, the market truly didn't get its legs until 2003. So, you have a nascent market for real estate in the second-biggest economic country in the world, trying to make up for 50 years of no market.

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