China: 'The Best Place to Invest in the Next Five to 10 Years'

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The Carlyle Group, one of the world's largest private equity firms, has been in China for nearly a decade and has contributed to the fast-growing private equity industry in China. Why is private equity so important in China now? What are its major challenges? China Knowledge@Wharton recently interviewed David Rubenstein, co-founder and managing director of the Carlyle Group, which was established in 1987 and today manages more than $75 billion in 33 offices around the world.

China Knowledge@Wharton: Many private equity firms have their eye on China. What are the opportunities and dangers there?

Rubenstein: We are very large investors in China. We operate in Shanghai and Beijing with very large teams, all of them PRC [People's Republic of China] natives. I think the single most exciting place to invest over the next five or 10 years is China, both in buyouts and in venture capital . Venture capital is already booming. Every major venture capital firm has a China strategy. We have a very good firm in China to do these kinds of transactions. Buyouts are more complicated in China because the government doesn't want large companies being sold to foreign interests. We own a lot of companies in China but we have minority stakes in those large companies. And they have done quite well.

It takes a long time to make the investments work. The rules are different from those in the United States. You have to understand that. You have to be very patient. I've told people, if you want to invest in China, which is a very good thing to do, be patient. Don't expect profits overnight. People in China don't wake up every morning and say, "How can I make American investors richer?" They don't do that. They want to build the best economy they can in China.

For 15 of the last 18 centuries, China was the biggest economy in the world. It probably only went down in the 1700s. Now China is regaining its momentum as a dominant economy. If you want to invest, you have to understand the Chinese rules and Chinese terms. That's why we have all the PRC natives investing there. Given its economic growth rate and its population, it will be the best place to invest in the next five to 10 years. It is not risk -free, but it is a very attractive place.

China Knowledge@Wharton: The Shanghai Composite Index has risen past 6,000 points. Is it anywhere close to a bubble?

Rubenstein: Well, you don't know you are in a bubble until the bubble bursts. Let me put it this way: Markets fluctuate. They go up and down. But China has the largest population in the world, and it has had economic growth in the last nine or 10 years of at least 9%, 10% or 11%. If the bubble bursts, maybe the economy grows at 7% a year. That's still greater than other economies in the world. China has had double-digit growth in the last 10 years, and if it is growing at 7%, it is not a calamity. I think the major difference between now and five or 10 years ago is that in countries like China, when the market went down previously, people ran away and said, "I've had enough of emerging markets , I've had enough of China, I've had enough of Thailand." Now people say it is a buying opportunity. If the market went down, money would race in. China is too large an economy and people won't say, "No, I'm not going here because it went down a little bit."

China Knowledge@Wharton: What about real estate in China? Some economists say the low interest rate in the United States is a driving force in the huge amount of U.S. dollars flowing to China. What accounts for such huge amounts of capital in China's real estate?