This past week the United Nations Conference on Trade and Development (UNCTD) released its annual FDI report. One of the interesting things about the report is that all four BRIC countries are now solidly in the top 5 of FDI destinations. We are truly witnessing the rise of these powerful “emerging” economies, and the revolution is well under way. It is also interesting to note China now occupies both the top spot as the destination of FDI but also the #2 spot in outward FDI. Quite remarkable.

Related to this, yet another milestone of China's rise in economic power There are two issues I wanted to briefly write about here. 1) We dismiss the strong fundamentals of China's economic growth at our own peril; and 2) one of the fundamentals of China's growth as viewed through “the second-tier city phenomenon.”

First, China still has its doubters. Every year there seems to be a new group of writers and pundits predicting the collapse of this house of cards. This year it was James Chanos, the wealthy hedge fund investor who shorted Enron, who has been stumping his prediction of the “bust of the myth of the biggest conglomerate of all: China Inc.” His analyses of China's stability and structure could not be more facile. It's almost embarrassing. Then there are the jingoists like George Friedman. Recently, I had the joy of reading (airplane reading) of taking in his audacious “futurist” work, the NYT bestseller, The Next 100 Years: A Forecast for he 21st Century. Here again: embarrassingly simplistic. Friedman writes: “[China] is not only an Asian state that allocates money politically and manipulates economic data. It is also a state in which equity holders--demanding profits--are less important than bankers and government official, who demand cash... China has expanded extraordinarily for the last thirty years. The idea that such growth rates can be sustained indefinitely or permanently violates basic principles of economics. At some point the business cycle, culling weak business, must rear its ugly head--and it will. At some point a simple lack of skilled labor will halt continued growth. There are structural limits to growth, and China is reaching them.”

I don't even know where to begin with statements like these. It all sounds very erudite; maybe he even took an economics class or two. But seriously, does this guy understand anything about China at all? I have many acquaintances (and some friends) who are among the economic elite Friedman derides as the political allocators of money and the manipulators of economic data. Behind closed doors they relish the underestimation of their economic prowess. Their view: yes, yes, keep thinking of us as backwater, simplistic capitalists; we are going to continue taking you to the cleaners at the negotiating table and we are laughing all the way to the bank. Can we at least ask that our experts in international policy spend some time with the people they are writing about? If only so they don't sound foolish?

Second, I want to take a few minutes to write about Chinese economic development in its current state and why people like Chanos and Friedman get it so wrong. Chinese economic development is an incredibly decentralized process. There are many nuances to this (which I plan to write about in coming weeks), but suffice it to say that the process is a decentralized local state entrepreneurial process. The Central Government sets broad macroeconomic policies; meanwhile, local governments (provincial and municipal) take on their own initiatives to compete for economic development initiatives (the attraction of foreign capital being a big part of these initiatives). This has led, recently, to what I like to think of as the second-tier city phenomenon in China: Local municipal governments have been incredibly innovative in their institutional systems and also in their initiatives to attract foreign capital, to create niche markets for economic development, and yes, Mr. Friedman, to develop *skilled* labor in specific industries.

· The case of Suzhou: how did it happen that Suzhou suddenly supplanted Shanghai as the major destination of FDI in the mid-2000s? There is a long, winding story to this, but the basic issue is that, with the backing of the Jiangsu provincial government in coordination with the Singaporean government (and an investment of $BN), the Suzhou municipal govt built the China-Singapore Suzhou Industrial Park, which, for a brief time, became the #1 destination for FDI in China. It is an unbelievable place. If you have been to Shanghai, stood on the Bund and looked out over the urban development phenomenon that is Pudong, you were probably impressed. You should really get out to Suzhou, because, you ain't seen nothin' yet. And the foreign managers I have spent time with there, people who talk about institutional security, environmental regulations, skilled labor: they are amazed. Hearing these people and then reading the words of “experts” like Chanos and Friedman, who are bestselling authors and rockstar hedge fund manages, all I can think is: “we are in trouble; we have no clue what is going on behind the scenes in China and we buy books by and invest our money with people who have no clue either.”

· The case of Chengdu: how did Chengdu beat out Chongqing as the primary destination of FDI in the western part of China? Here again, the story is about an entrepreneurial second-tier city. Talk to the senior people of Intel in China... they will tell you a story about a flexible, entrepreneurial (and capitalist and opportunistic) government that believes in creating stable institutions, building a base of skilled labor, and winning in the global economic game. They are building the infrastructure of a dynamic, modern capitalist economy that is helping to position China for the future. And I am sure, if they took the time to read it, they would laugh at Friedman's characterization of China's economic weaknesses. They are probably saying, “Yes Mr. Friedman, keep beating that drum, keep underestimating us. Keep believing that we have no idea of what we are doing. We are just going to go about our business and become the most powerful economy in the world.”