The Optimistic Thought Experiment - Thiel

However that may be, there is no good scenario for the world in which China fails. The short-term consequences of such a failure would include a lack of cheap capital from a Chinese savings glut; fewer cheap goods from China; massive political unrest within China; and deep recessions throughout East Asia and most emerging markets, whose derivative growth is the caboose to China ’s locomotive. And so we are led to ask: To the extent that China involves a leveraged play on globalization, should one therefore simply invest in the Chinese stock market? In our optimistic thought experiment, one might expect China to outperform the rest of the world in every good scenario.

If there is a catastrophic approximation embedded in this analysis, then it consists of the conflation between China as a real economy and “China” as a financial instrument. To say the least, there are many eerie parallels between the Chinese stock market of early 2007 and the Nasdaq of early 2000: an abstract story of long-term, exponential growth; rampant speculation; and unprofitable or overvalued companies.

One intermediate possibility is that the China of 2014 will be like the internet of 2007 — much larger, but with winners very different from the ones that investors today expect. The largest New Economy business is Google, a company that scarcely registered in early 2000. Might it also turn out that the greatest Chinese companies of 2014 will be concerns that are private and tightly controlled businesses today, rather than the high-profile and money-losing companies that have been floated by the Chinese state?

At the very least, outsiders need to understand that China is controlled for the benefit of insiders. The insiders know when to sell, and so one would expect the businesses that have been made available to the outside world systematically to underperform those ventures still controlled by card-carrying members of the Chinese Communist Party. “China” will underperform China, and a “China” bubble exists to the extent that investors underestimate the degree of this underperformance.²⁸

This limitation also may be framed in terms of globalization. In important respects, “China” as a financial economy is sustained by the absence of globalization — in particular, by the enormous amounts of capital trapped within China’s borders that must either suffer slow death from inflation (now running higher than Chinese bank deposit rates) or brave the acute sense of vertigo of the elevated stock market. Because the free convertibility of the renminbi would dampen equity speculation, a long “China” position is not a forecast that financial globalization will succeed, but rather a bet that its internal contradictions will persist.