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 (brush up on some China funds articles to understand how relevant China is when it comes to other assets as well).

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.