The Entrepreneurs versus the SOEs
For decades, China's industries have been dominated by the country's state-owned enterprises (SOEs). These businesses are still ubiquitous in China, but with rare exceptions they are not the places where investors will make money. More to the point, investors should stay away from almost every SOE stock they encounter. This is because private businesses have already become the most important drivers of China's growth, displacing the inefficient and wasteful state-owned enterprises.
The strength of entrepreneurial businesses is evident to those investors who know what the numbers in China really mean: China's 2005 growth rate of 9.8 percent included all of the nonmonopolistic SOEs, which collectively lost money. They were actually a drag on the economy. Yet, American mutual fund managers and exchange-traded funds that are investing in China continue to put most of their capital in these SOEs. We'll cover more of the dangers awaiting investors who buy "China" funds in Chapter 11, but for now, you should know that funds that are heavily weighted in SOEs should be avoided.
The reason so many fund managers and Wall Streeters focus on SOEs is that they were the dominant industrial force in China for four decades. That is no longer true, and by knowing this you will set yourself apart from the millions of investors who will put their money in danger by putting it in SOEs.
The real force behind the China Miracle is the Chinese people and the new age of entrepreneurs. They are, and will continue to be, the long-term stewards of corporate and future economic growth in China. In the process, they are creating entirely new industries that are servicing long-suppressed needs on the part of both consumers and businesses.
You should understand a bit about the role of state-owned enterprises versus private entrepreneurs. To that end, I'm going to walk you through the SOEs and the rise of China's entrepreneurial class. The existence of these two business factions underlies the China Miracle–for better and for worse. They also provide us with a way to differentiate the old way of doing things in contrast to the new era of private sector commerce. The old way is epitomized by the SOE and the creation of China's exchanges, while the new era is defined by entrepreneur–individuals who are creating companies so big and profit table that the money they are generating is eclipsing the performance of America's best-known entrepreneurs.
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