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What Would Happen if China Were to Have Economic Problems?

Posted on 30 May 2014 by Andrei

Many domainers are basing the entire business model on arguments such as “the Chinese are buying” or “there’s lots of demand from China” and sure, the let’s call it China effect has been impressive when it comes to numeric domain names for example.

But are domainers expecting too much from China?

In my opinion, a lot of them are because they’re making the mistake of seeing China as a never-ending source of money. Don’t get me wrong, there’s a lot of money in China but it’s the “never-ending” part that I don’t agree with.

China has been doing very well for a reasonably long time and therefore, more Chinese people/companies have access to capital than ever before. A lot of times, they don’t have a lot of experience as investors because this situation is relatively new to them and examples of capital allocation mistakes abound.

From large-scale examples such as ghost cities that shouldn’t have been built to small-scale examples such as Chinese investors who are buying certain assets far too aggressively, it should be clear that a lot of mistakes have been made.

At a certain point, there will be consequences.

If you understand boom and bust cycles, you understand the point I’m trying to get across. During the boom period, people become too euphoric and therefore make capital allocation mistakes, mistakes that end up being corrected during the bust period. These boom and bust periods have been around for a *very* long time and let me ask you:

Are you tempted to say “this time it’s different” when it comes to China?

In my opinion, that’s when you can tell that the bust period is reasonably close, when people start assuming that “this time it’s different” in order to justify their excessive optimism.

As far as I’m concerned, I’m bullish on China in the long run but that doesn’t mean it won’t have its share of bust periods. In other words, while China will probably do very well in the long run, it would be foolish to assume that there will never be bust periods and that “linear growth” is “the new paradigm” when it comes to their economy.

Be very careful whenever you hear expressions such as “this time it’s different”, “we’re dealing with a new paradigm” and so on. Also, don’t forget to ask yourself the question which constitutes the title of this post every now and then because if your business model is built on the assumption that there will never be bust periods in China, it is in my opinion deeply flawed.

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5 Comments For This Post

  1. DomainInvestor Says:

    where have you heard “this time it’s different”, “we’re dealing with a new paradigm” and so on”?

    Is this from others in the industry or in publications?

  2. Simple-Man Says:

    Numeric domains will suffer the most, rest will have some impact.

    Thanks.

  3. Andrei Says:

    @DomainInvestor: the more you hear opinions such as the two you have referred to (on blogs, forums and so on), the more reasons you have to start believing that the bull run is over or close to being over. It’s a reasonably good indicator in my opinion, not the only one of course but a reasonably good indicator nonetheless.

  4. DomainInvestor Says:

    @andrei exactly, that’s why I am asking you where have you heard the “this time it’s different?” Where is your supporting evidence or are you just writing for nonsense.

  5. Andrei Says:

    @DomainInvestor: you misunderstood the message I tried to get across. My point wasn’t that everyone is saying “this time it’s different” right now and that the bust period is therefore close, I was saying that when a lot of people will say that, it’s a reasonable indicator that the bull run is close to being over.

 
 
         
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