China in Perspective

China is one of the fastest growing economies that the world has ever seen. In 1820, China was the world's largest economy and the train may have already left the station once more. After listening to a presentation by AlphaShares, I visited their web site to find:

Since market-oriented reforms were initiated in 1978, China has successfully transformed itself from an agriculture-based economy into a manufacturing-based economy and from an economy almost entirely composed of state owned enterprises to one with increasing private ownership and market-based incentives. As a result, the Chinese economy has experienced significant and rapid growth over the last ten years. China has become, and will continue to be, the principal driver of global economic growth for the 21st century.

When deciding how safe your investments are in China, investors look at a series of factors:

• Overall economic growth
• Its increasing political influence and military ascent
• The great economic disparity between the classes
• Environmental issues
• Potable water and its rapid decline
• Communist, one party rule
• Lack of personal freedom
• The number of men "coming of age" in a country that has exported its women. There will be a lot of "frustrated" men around
• Its relationship with Taiwan and other potential military conflicts

This week, the Chinese Communist Party begins its weeklong 17th Party Congress. This is an event held once every five years. The LA Times reported Sunday:

In China, party's tight grip on display

Control and secrecy are paramount. Nearly a year before the congress, the propaganda ministry distributed its list of forbidden media topics for 2007, which included judicial corruption, lifestyles of the wealthy and extramarital affairs.

Several months ago, state media stopped reporting all "bad news." Until a few weeks ago, even the schedule was a state secret. The 2,217 delegates are now sequestered in a few hotels, beyond the reach of family, friends or reporters.

Internet controls have been tightened, about 18,000 websites shut down, television bra ads banned, unscripted TV programs and foreign dramas yanked. Most on the government's list of "troublemakers," including chronic petitioners, civic group members and social activists, have received police warnings, been placed under house arrest or detained.

The NY Times reported today

China Warns U.S. on Dalai Lama Trip

Chinese officials warned the United States not to honor the Dalai Lama, saying a planned award ceremony for the Tibetan spiritual leader would have "an extremely serious impact" on relations between the two countries.

Speaking at a Foreign Ministry briefing and on the sidelines of the Communist Party's ongoing 17th National Congress, the officials condemned the Dalai Lama as a resolute separatist and said foreign leaders must stop encouraging his "splittist" mission.

"Such a person who basely splits his motherland and doesn't even love his motherland has been welcomed by some countries and has even been receiving this or that award," Tibet's Communist Party boss, Zhang Qingli, told reporters during the congress.

"We are furious," Mr. Zhang said. "If the Dalai Lama can receive such an award, there must be no justice or good people in the world."

China has bought into Blackstone and today it also reported that China's Citic is in official talks for a stake in Bear Stearns. So it may be true that money is thicker than political ambition and that military action outside its borders is unlikely. After all, China now has the second most billionaires after the US.

I believe in investing in China and that economic ties bind. I also keep in mind that China has a long view and a real long-term strategic plan. We are not aware of that plan. Not knowing keeps me aware of another historic fact that feels oh so coincidental: today in 1964, China detonated its first atomic bomb.

Disclosure: Long several China ADRs.