Nagorak:

The latest Mauldin letter had a sobering article from Vitaliy Katsenelson discussing growth in China and why it probably is not sustainable.  I think this is worth considering because global growth is the corner stone of a lot of what people talk about around here.  In short, if those growth expectations are overblown, then we could be in for a rude surprise. 

Well, that's a thought sobering enough to ruin my day--a day otherwise spent cheerfully adding stock to my China portfolio!

The issues raised by Katsenelson are certainly real; growth doesn't occur uninterrupted. But that isn't the whole story. China is large--about 15% of the world's population, I think? And it is a culture with a long history and a predeliction for long-range planning.  Great as the problems may be, there is also a deep pool of resources--I mean not just physical materials, but also human talent, intelligence and willingness to work toward a collective goal without an immediate or personal reward--from which to devise solutions. The story won't be as simple as stunning success (all Bull, all the time), or abject failure (all Bear); it will be complicated, and episodic.

A big part of the problem K describes is the economy's high degree of dependence on the manufacturing sector, 40+%. Yes, that kind of balance is unsustainable. I suspect that this idea is not unknown in the Chinese leadership circles. I doubt that they will be taken by surprise by the consequences as growth slows down to a sustainable level. If a society of that size were to become unhinged by systemic failure, the consesquences would be unthinkable. Somehow, I expect that China will navigate the rough waters with no more damage, and hopefully less, than the U.S. experienced in the 1930's --and 1830's, and bunch of times in between, and, who knows, maybe again, sooner than we would like.

BTW, in my choice of China stocks, I have no industrials, having taken into account the over-building of that sector. Alernative energy, health, transportation, financial, tech, and (next in line) telecom. And I'm up (a little) so far this week (vs. FXI  -5%) . Better to be lucky than smart, maybe, but it shows that even in a down market there are niches of profitability. I wouldn't give up quite yet; there's at least a rally or two left in the old dragon.

 --Aalan