Bronte Capital on Chinese Kleptocracy

For those of you who have read Bronte Capital over the years as I have, the egregiousness of a new Chinese Reverse Merger Fraud no longer even registers.

For anyone interested, John Hempton has a long series of posts on the Carlyle-and-company bid for Focus Media, asking whether the company is genuine, fake or a mixture (with only fakery representing a bad investment for the PE bidders).  Interestingly, the commentators on the latest post have begun to speculate on whether Carlyle and the other bidders know the company is fake (after all, could the most politically well-connected PE firm in the world really be duped so brazenly) and are merely using the big to gain political favor with the Chinese political elite.

Hempton layes out his essential thesis -- that China, due to its astronomical growth-rate and its prevention of earning a decent return on savings -- is kleptocracy of a scale never before seen in human history -- here.

While I'm unsure that Hempton's argument that dampening inflation will promote revolution is sound -- with spoils flowing around so freely, won't a self-interested peasant attempt to climb his way up rather than upheave the system -- his description of the rampant looting of State-Owned companies is an important message to disseminate to Western observers who, perhaps impressed by annual growth rates that would make Obama or Romney envious, might look East to invest. We wouldn't want you to become  the next John Paulson with respect to Sino-Forest.

While the world has perhaps never seen seen a kleptocracy of quite this scale before, the basic model is surely familiar to Russians, Indians, Medieval European peasants, even Romans -- history repeats itself -- the substantive American Middle Class appears to be an aberration, eroding even in our own country as the 1% steadily accumulate a greater and greater share of the wealth.

It will fascinating to see if China can eventually develop Western rule-of-law to go along with rule-of-the-dollar. Until that day, China is surely the land where fortune can be made or lost -- but, be careful, no matter how clever you may be, when there is no one to appeal to the that the game is rigged, you might just loose all the same.

Lydgate