Winston Churchill once called Russia "a riddle wrapped in a mystery inside an enigma."

While Russia still isn't the easiest place to understand, perhaps the deeper riddle these days is how to think about China. I realized this after receiving a thoughtful note from reader Eddie C., in response to last week's piece, "China, Congo and the New Race for Africa."

Sir,

As far as I can see, China is doing a real good job to these under-developed countries such as Congo. She put in her hard-earned capital to open up these countries, whether be they in Africa or Asia. It is a win-win situation. Where is the human rights violation?

The Chinese did not force these countries to buy opium at gun-point by a cohort of Western countries as what had happened to a weak China in the last century… they did not colonize countries like India or Malaya and treat their citizens as second class servants.

Your prediction that China would gain $400 billion out of a $4 billion investment is grossly exaggerated. Even if it is true, the profit will be shared by the people of Congo (as it is a joint-venture). Aren't the US and the Europeans doing the same thing? Why pick on China?

...Please be fair and truthful.

Eddie C.

Dear Eddie,

I understand where you're coming from. Let me make clear I wasn't trying to bash China in regard to what they're doing in Africa. In fact, I have a strong measure of respect for what they're doing. What country wouldn't want to act in its own long-term interests? What country wouldn’t want to leverage the power of wise investments today to supply their own vital resource needs tomorrow?

No, what China is doing in Africa is very smart.

You also point out that Africa will benefit from these investments. I don't disagree. Odds are that Africa's level of benefit could be very strong, especially in comparison to the disaster of Western aid -- the hundreds of billions that have gone to waste in the past. When rich governments write checks to poor governments, all too often the cash winds up in the pockets of thieves and thugs.

Even charitable gifts can do more harm than good, as some African locals have lamented. When second-hand T-shirts and sweatshirts show up in poor countries by the truckload, they often wind up being sold on the black market. The net result is profit for bandits and a total block on any type of textile industry. (While local clothing makers can compete with cheap imports, they can't compete with free.)

In contrast to all this, what China is doing is like night and day. Opening mines, building hospitals, paving roads... all these activities require training and infrastructure and jobs, and that's a great thing. It's a means by which Congo (and other countries) can benefit, not to mention the shared benefits of resource deals. I don't want to take that away from China at all.

Valid Concerns

I still think Peter (the Congolese journalist) has reason to be concerned, though, because with China there are still valid human rights questions to ask. There is a lot of good that comes out of a bluntly pragmatic stance, but there is danger, too. In places like Sudan, China has shown its willingness to look the other way when atrocity occurs. Money flow from resource deals can wind up supporting that kind of atrocity.

There are also fair questions to ask about how resources are extracted and local land is used. When it comes to metal mining and oil and gas production, for example, we know there are better and worse ways to do it from an environmental standpoint.

The lowest-cost way to rip a resource from the ground is often the one that leaves that ground denuded by chemicals and all but stripped bare. So there are valid questions in regard to how Congo's water and soil and sky might look in 20 years' time.

As far as what the West did in the 19th and 20th centuries, and how to think about that -- I can't argue with you there. The history you point out is indeed a matter of record.

A Hard Question

This all leads to the question stated earlier: How to think about China? For many in the West, this question is still unresolved.

Some, like legendary investor Jim Rogers, embrace China as the next great nation and the rightful heir of the 21st century. Others, quite frankly, view China as an environmental black hole, an ongoing human rights disaster, and a large-scale military conflict waiting to happen.

Which view is correct? As global investors, we here at Taipan lean much more toward the Jim Rogers view. But, as with many things in life, the answer is not black and white. Instead there are many shades of gray.

First the Bad (Then the Good)

Those who accuse China of human rights violations have plenty of evidence to back their claims. Consider this recent news from the International Herald Tribune:

China said Wednesday that it was investigating whether hundreds or perhaps thousands of children from poor areas in the southwest part of the country had been sold to work as slave laborers in booming coastal factory cities.

Authorities in southern Guangdong Province, near Hong Kong, said they had already rescued more than 100 children from factories in Dongguan, a huge manufacturing city known for producing and exporting toys, textiles and electronics.

The children, mostly 13 to 15 years old, were often tricked or kidnapped by employment agencies working in an impoverished part of western Sichuan Province, and then sent to factory towns in Guangdong, where they were often forced to work as much as 300 hours a month for little money, according to government officials and accounts from the state-owned media.

And of course, we already know about other ordeals near and far. For some the horror of Tiananmen Square has not yet faded; the horror of Tibetan crackdown is fresh in many others' minds. (This is another very touchy subject, where many Chinese feel that Tibet has unfairly benefited from long-lived romantic perceptions in the West... but we won't get into that today.)

To add to the above, we've seen the product scares that have tainted toys and food and medicine. Western buyers of Chinese goods have recoiled in horror at the thought of poisoned pet food and deadly toothpaste.

We've seen the market for Shanghai A-shares rise to the sky and then crash by more than half, as new investors learn the hard way that relying on the government to keep shares up is a generally a bad idea.

We've also seen how business in China can be rife with corruption. "Guangxi," or connections, are still vitally important to making progress. Intellectual property laws are just now taking hold. Local politicians look the other way as businesses cut corners and dump toxic waste into rivers.

And speaking of rivers, the pollution problem is still seen as one that could hobble (if not cripple) China. The horrors of choking smog and acid rain are exported, too, though not on purpose. Russia has been up in arms over cross-border pollution by way of the Songhua river; sooty emissions from Chinese factories have crossed oceans, winding up in smog filters in Lake Tahoe.

A Familiar Story

The concerns go on and on… but in all fairness to China, they are only one side of the story.

When one takes a hard look at many of these concerns -- harsh labor conditions, tainted products, dodgy business practices and so on -- another country’s past comes to mind. That country is the United States.

Jim Rogers points out how, in many ways, China today resembles the U.S. of the 18th and 19th centuries (except, of course, for the fact that China today is advancing at a much faster pace).

A hundred years ago in the U.S., one was just as likely to have serious issues -- sometimes deadly issues -- with product quality, or to run into some crazy business scheme out at the edge of the law.

The U.S. developed an early taste for brands (like Procter & Gamble) precisely to combat the trust problem, so that consumers could know exactly what they were buying and who from. Certain products became household names precisely because they could be trusted. (Ray Kroc built McDonald’s around a very similar idea.) Today, Chinese consumers are starting to embrace brands for the very same reason.

Plenty has also been written on the terrible labor conditions of 100 years ago, the awful pollution of early industry, and the lack of protection or regulation on 19th century (and early 20th century) stock exchanges. Between robber barons, bear raiders, bucket shops and the like, it really was a "Wild West" back then.

So when you consider that China is going through an extremely rapid learning curve -- one that the United States also went through, albeit too long ago for most to remember -- the picture looks a little different.

More to Explore

There's more to explore here, but this is probably enough for a Friday.

To really be fair to China, it's important to talk about the hardships the country has overcome, and to highlight some of the amazing feats China has already accomplished. (Eddie, I hope you aren't too upset that I haven't talked more yet about some of the great and good things China has done. We'll get to those. The topic is far from closed…)

For one thing, there's the question of how a country of billions, after being destitute for so long, was able to turn itself around so rapidly in the first place. Then there's simply the sheer size and scope of change -- the great numbers being lifted out of poverty, the promises of tomorrow for billions of aspiring middle class, and so on.

China's past and future are both deeply fascinating (in your editor's humble opinion). What's more, a working knowledge of both can only have positive impact on one's portfolio. We'll dig more into this topic -- what's happening in China and how it came about -- fairly soon.

And if any of you would like to write in with your thoughts and opinions on China -- good, bad and the like -- then by all means please do: taipan@taipanpublishinggroup.com.