Chapter 1
What Is an Emerging Market?: China: The Opportunities and Risks Within the World's Second-Largest Economy

When I was 14, I traveled with my father to Shanghai. The last leg of our 36-hour journey was a midnight rickshaw ride. Pedaling us was a thin, barefoot teenager who spoke to us in Mandarin, which neither of us could understand.

Wiry and hard-faced with legs covered in dust, the pedaler looked only slightly older than me, and I wondered how he would get enough sleep before school the next day. Then it struck me: He didn't go to school. This was his life, realms away from mine. School was irrelevant to him.

A decade later, the gold-foil seal on my Wharton MBA degree was still fresh as I landed once again in Shanghai. Only this time I wasn't pulled around by a rickshaw on a dirt road. From the city's massive Pudong International Airport, I climbed into the brand-new magnetic levitation train, like a child on a theme-park ride. My stomach dropped as the train lifted off the tracks and began to float on air. The ride was silent and smooth with occasional wind hisses and ground roars as we glided through air at a blistering speed. When the train slid to a stop, I exited. I figured I'd find my way to my hotel from there.

I found myself amid a sea of restaurants, fruit stands, clothing stores, and two-yuan shops (25-cent shops). The words of the original adventure capitalist, Jim Rogers, echoed in my ears: "The Chinese are the best capitalists." Though I had perceived the country to be a beacon of communism, China's new commerce, competition, and energy were jarring.

I made my way to the hotel, nestled in the frenetic energy of the Pudong district, excited for the adventure ahead-a one-month journey through this emerging region. On my first evening, I marveled as hundreds of people emerged from surrounding high-rise apartments to convene on manicured courtyards and shopping center walkways.

In the Chinese courtyard, singles line-danced, and couples waltzed against the backdrop of luminous skyscrapers that housed families and businesses, often within the same complex. The skyscrapers were outlined with lights that beamed and blinked into meticulous designs. The streets hummed from the tires of Maseratis, e-bikes, and rickshaws that all paused as throngs of people filled the double-wide crosswalks. Seated next to a family chattering on a bench, I sipped mint tea and took it all in.

A mix of Western coffee shops' vanilla and chicory and old-world markets' sesame and garlic scented the streets and alleyways. Music blared from all around: stone-shaped stereos along shopping center sidewalks, booths in markets, and cyclists' Bluetooth speakers. Yet the myriad conversations in Mandarin, less Cantonese, and a bit of English among young students could not be drowned out by the music.

While I could see a richness in the culture, all of its potential, these markets were still hungry for wealth. The limited access to capital starved the local economy, the ability of businesses to thrive, and, in fact, for humans themselves to thrive. With greater wealth, I mused, the local economy could soar, bringing prosperity and peace to these people.

A quarter century has since passed. If economic dominance of the twentieth century was a race, the United States ran away with the gold. Even now it accounts for a quarter of the global economy. However, while the United States is squarely positioned as the world's principal financial powerhouse, other countries have established growth and investment strategies of their own, positioning themselves as what we call "emerging markets." As hard as it may be to believe, some still consider China to be one of those countries.

She Will Shake the World

One sign that has risen well beyond that came in 2018, when the largest stock market in the world, the onshore China market, announced it was opening to foreign investment. Despite its gargantuan size, the market had until then been closed to foreign investors. As such, no one in the United States had built a fund to invest in it. While international investors had bought Chinese securities via American Depositary Receipts (ADRs) or listings in Hong Kong (deemed "offshore"), the country's main stock market, its onshore one, had been closed off to outsiders.

I was managing portfolios at one of the world's largest emerging markets investment firms when the opportunity of a lifetime passed my way. A prospective client asked whether my team and I could build a fund that invests solely in the onshore China markets. Since I already had a successful history of pioneering investment funds in emerging markets, I readily agreed to investigate.

I longed to undertake the challenge of being among the earliest US investors in the Chinese onshore market, but the risks were not lost on me. I did not speak Mandarin, and China was a notoriously closed society. Further, the market was nascent and fraught with political, economic, and social hazards.

Plus, I was a quantitative investor. My process was built on objectivity. I used computerized systems to systematically evaluate a company's characteristics. Using technology, I could invest in hundreds of stocks at once, benefiting from breadth instead of depth. Could this arm's-length process work in the case of China, where the "invisible hand" of government plays such a significant role? By this point, I had visited China frequently enough to know that the Chinese economy was an enigma in more ways than one.

In the land of the Middle Kingdom, the visible dichotomies mirror its ideological ones. From my Western point of view, China is composed of tradition, transition, mystery, and questionable ruling methods, all in equal parts. It is a thriving capitalistic economy under communist party rule. Just a few years ago, it would have been hard to imagine the country as a consideration when devising an investment plan. But today, China co-leads the pack of world economic leadership.

For the capitalist financial system to work, a society needs people to generate money and to spend it. One of China's greatest assets, positioning it to earn the title of the world's second greatest economy, is people power. Populations of "small towns" in China boast numbers greater than the entire state of Mississippi.

Yet as China's economy emerges, it offers a striking juxtaposition in its quest for peace and prosperity. While the United States and China represent the largest economies in the world, the largest drivers of growth, and the largest polluters on earth, their pathways to get here have been markedly different.

China challenges our most basic Western notions. The country has achieved scale in secrecy, rocketed growth while maintaining stability, and grown a burgeoning middle class, yet remains rife with massive violations of human rights.

As the country's economy has risen, China has awakened from a great slumber of hundreds of years and, today, embodies the epitome of a rising power, potentially reentering another one of its great dynastic eras. Two hundred years ago, Napoleon Bonaparte recognized the potential within the country, warning us all: "Let China sleep, for when she wakes, she will shake the world."

Understanding China's dichotomies is more than an intellectual exercise. The paradoxes prompt us-today's investors, policy makers, and market participants-to ask several unsettling questions: Is China the next great market and a world power? Perhaps more profoundly, we know our investments do more than generate returns. They build tomorrow's ecosystem. Is China a sustainable ecosystem in which we want to invest and that we want to empower?

Hot Stocks in the Heart of Capital

As China's onshore market emerged, I couldn't resist the challenge. With the impressive breadth and depth in the local market and its vast mispricings, I could find copious opportunities for investment. In established, developed markets, "unicorn" stocks-those with attractive growth prospects, good management teams, and yet an underpriced valuation-were hard to find, but in China, the opportunities seemed almost ubiquitous.

I decided to go for it. I was going to launch the firm's onshore China A fund. But first my team needed to raise capital.

The day on which I was scheduled to do one of my first fundraisers was problematic. I awoke not in my hotel room but in an emergency room. I had some unusual pain the night before, and my doctor had recommended I visit the ER given the late hour.

By 6 a.m., I was becoming desperate. "Can I be discharged soon?" I asked the nurse. I would be speaking to some of the world's most sophisticated investors in just two hours' time.

She smiled at me-a calming, knowing smile of someone who had cared for many working mothers like me or who was one herself. "Let me get the doctor," she responded.

The tests confirmed that the baby I was carrying was safe. My daughter was due in six months, and we had a long road ahead before her arrival. But before her, I had to deliver this other baby-our firm's new China fund.

After I was discharged, I showered quickly back at my hotel. I then scurried down to the lobby level conference room, suited and booted, briefcase in hand, and...