What a naive long China strategy misses

People who go long China's economic growth by buying their equity index will miss out on a lot China's growth. Via the Economist I came by this interesting fact:

"Qiao Liu and Alan Siu of the University of Hong Kong calculate that the average return on equity of unlisted private firms is fully ten percentage points higher than the modest 4% achieved by wholly or partly state-owned enterprises."

While looking at this, it is important to note that this is just state owned firms and not firms with ownership by government officials. But the outperformance of unlisted firms does suggest that the average investor looking to go long China's listed equities are not participating in a large portion of China's economic growth. Marc Faber anticipated this as far back as 2002 when he wrote Tomorrow's Gold and made the analogy between China today and the United States in the 1800's. The 19th century United States economy grew a lot, but the opportunities available to foreign investors, mostly railroad stocks, didn't give foreign investors corresponding returns.

About

I studied Bioengineering at the University of California at San Diego. While there I served as a trustee on the investment committee of the UCSD Student Foundation, a group that manages an endowment to fund scholarships. While in college I applied my interest in finance and economics by working as a summer associate at Clarium Capital Management, working part time my senior year, and joining full time when I graduated in 2006, staying there through August 2010. I am currently working as a portfolio manager at another global macro hedge-fund in the Presidio (And blogging about more directly market related ideas at their restricted blog). I’ve been focusing on quantitative finance, currencies, commodities, the interplay between finance and politics, demography and other long term trends.

Disclaimer: You shouldn’t consider anything on this site to be a recommendation or solicitation to buy, sell, or hold any securities or commodities. I’m not offering you investment advice. I or the company I work for may hold positions in securities that I mention.