You can't afford not to invest in China, despite the country's problems

The dramatic fall from grace of former political high-flier Bo Xilai, the two-week walkabout of leader-in-waiting Xi Jinping, rising tension with Japan and the launch of the country’s first aircraft carrier mean the run-up to November’s leadership transition could hardly be more fascinating – or worryingly uncertain.

Meanwhile, for investors in the Chinese stock market, 2012 has been yet another extremely disappointing year. The Shanghai Composite index stands around 12pc lower than a year ago, has lost a third of its value in three years and two-thirds against its pre-crisis peak.

It is all a marked contrast to the feeling in the immediate aftermath of 2008’s financial crisis that China could single-handedly pull the developed world back from the abyss. And it begs the question of whether economists and investors are being as irrationally gloomy as perhaps they were overly optimistic before. It matters because no one wants to be the dumb foreigner backing the China miracle even as the country’s own residents are heading for the hills.

One reason to believe the pessimism may have been overdone is the traditional investment splurge that has followed leadership transitions ever since the new market-oriented regime began following the death of Mao in 1976.
The shift in sentiment has been dramatic. Some of those attending the recent World Economic Forum meeting in Tianjin, a fast-growing port city half an hour by high-speed train from Beijing, were struck by the note of pessimism and cynicism about China’s prospects.