China's Financial Future

Question: Will China surpass the U.S. as a financial superpower? 

Michael Mauboussin: I think the future for growth is quite bright. That said, there are a couple key things for ultimate growth. One is to make sure that intellectual capital is well protected. So much of the wealth creation in our world is not going to be from agriculture or even basic manufacturing, but really the world of ideas, services and knowledge goods. And for that to really work in a society, they must be well protected. I don’t think that’s yet perfectly the case in China. 

The second thing is they’re working on their education system and its becoming much improved, but still the elite education system is based in the West, predominantly, the United States and to a lesser degree, Europe. Now that is changing, but that won’t change overnight. And what’s important about that educational system is that is it leads to ideas in services and knowledge. And that’s really important. 

And the third thing is while their stock markets are now certainly developed, they're still not a fully developed community that allows for, for example, our venture capital community; investing in new businesses, mechanisms to succeed, but also mechanisms to fail. And I think those are some important pieces of glue that allow for a sustainable long-term growth that China has yet to fully adopt. So will they grow, yes. Will they close the gap with the United States; I think the answer is yes, but it’s essential that some of those other pieces click into place for it really to be ultimately the next big superpower. 

Question: Where will the next financial crisis come from? 

Michael Mauboussin: There are a couple of areas that I think the people should keep an eye out and these are well known, so I have no particular insight about these. Certainly, the China property market is something. We’ve seen some reports and some of that’s already rolled over, but China’s had a very, very overheated property market and that could be something that would be vulnerable, and again the magnitude would not be the same as it was in the United States, but that would be quite costly. 

Another one is the U.K. property market; I think the U.K. has also had a very strong property market and it’s got some of the same characteristics, but I don’t really know if those things are legitimate concerns or bubbles that’ll deflate. I know it’s funny because a lot of people do want to talk about bubbles and that we should try to prevent them and so forth. And, you know, I think the classic line from Alan Greenspan to Ben Bernanke is it’s very difficult to know until after the fact and I can see both points of view on that, but it is hard to really anticipate these things with any sort of... in a systematic way.

Recorded on May 14, 2010
Interviewed by Jessica Liebman

It’s essential that several pieces click into place for the country to become the next big superpower, but its future looks bright.

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