Some people like to dream they will earn money by investing in stock. No one can intelligently follow everything that is happening in the stock market. That is especially true nowadays, when people can invest not only in companies in their home country, but in companies around the world.

Successful investors often pick segments of the market or themes for their investments. For example, financial firms or steel manufacturers or defensive stocks. They research their segment or theme thoroughly before jumping in or out. This preparation gives them some assurance that their choices make sense.

 One theme that is gathering great interest among investors is China. Headlines in many financial publications rave about the growth of the Chinese economy and the growing rivalry between China and the United States as superpowers. Chinese stock is available in US markets, so it is not necessary to figure out how to invest directly in the Chinese market. Buying investments in China is easy for anyone who wants to jump in.

 For many people Chinese investing is like the proverbial dart board of riches. Some believe China’s economy is on a roll and it is only a matter of time until China surpasses the US. Given that belief, these investors figure that it makes sense to pick Chinese companies that are small today and assume they will be big tomorrow. What companies? It does not matter, some people say. What is small today will be big tomorrow as China takes over more and more of the world’s business.

 Indeed some Chinese companies on the market have grown rapidly. Two examples are the Chinese oil company traded as CNOOC and the Chinese Google, Baidu. If you bought those stocks a few years ago you have a very big smile on your face today.

 But Chinese companies do not always succeed. Not only do some Chinese companies not grow as big as their dreams, there are examples of Chinese companies which grow very big but run into walls and crash. Companies that at one time appeared poised to become world leaders in their industries do not fulfill their promise, and perhaps even make fatal blunders.

 The British financial publication Financial Times recently had an article on the company TCL. At one time this company was the world’s largest television maker. It was well placed in a desirable segment of the technology market, which has been one of the few markets which has survived the world’s recent economic problems in reasonably good shape.

But the company is now in bad shape and losing money as fast as it once made money. According to the article, written by a Chinese observer of his country’s economy, the company’s bright prospects were dimmed by the vagaries of the Chinese business world, which is a mixture of entrepreneurship and state involvement. In this case, a great deal of the money needed for plant and equipment and such came from the local government, which set its own rules. Rules that governments need to justify their investments sometimes do not fit the needs of entrepreneurial enterprises. It appears as if TCL is a classic case of this oil and water mixture. TCL could not move as nimbly as it should have. It made some bad decisions to try to rise to the next higher economic level. And it just plain blew its advantages.

 The article suggests several messages to investors in the Chinese market. The most obvious lesson is that great success at one stage in a company’s growth does not guarantee future success. One cannot simply pick Chinese companies and assume their trajectory is in one direction – onward and upward – only. An investor can lose money in China.

The more ominous message for China in this article is that the transition of Chinese companies to the next stage may not occur frequently. Chinese companies have had great success in the last few years when they have been tied to large foreign investors and partners, such as large multinational companies from all over the globe which use China as their workshop. The next stage for China should be the development of their own multinational companies which sell their own products around the world.

 Immediately after World War II Japan busied itself doing work for non-Japanese partners. It was not until later that companies like Sony and Panasonic spread Japanese-made products and brand names. Whether or not China will develop its equivalents to Sony and Samsung is an important question. If it can, investment today in growing Chinese companies makes sense. If it cannot create brands people all over the world want to buy the future of investment in Chinese companies will be weak.

 This FT article casts some doubt on the ability of Chinese companies to emerge onto the next stage. It warns that there might be more TCLs waiting in the wings.

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Tags: China investment, Chinese economy, Chinese stock, investing in stock, investments in China