03/18/2010 05:12 am ET Updated May 25, 2011

China's Boom: The Sure Thing Not to Bet On in 2010

The predictions are in for 2010 and while there's a lot to debate, some trends seem so obvious you'd be nuts not to invest in them. Among the ones that everyone can see, for example, is that emerging markets, particularly China, have the momentum going into this year. Maybe you missed the truly spectacular 80% return in the Chinese market last year, but no matter: There's more where that came from.

Well, maybe.

I'd be the first to admit that I don't have a crystal ball, but it does make me nervous when everyone agrees on how the future is going to unfold. You have to ask yourself: If it's so clear that this is China's year, how are you going to make money betting on it? What's obvious to you is also obvious to everyone with a 401(k) account -- let alone to every money manager between Wall Street and Shanghai. Wouldn't that suggest that the outcome is already factored into the prices? (CBS MoneyWatch columnist Larry Swedroe explains why high-growth economies don't always create high-return markets.) And worse: What if the consensus turns out to be wrong?

Let's take a closer look at China's golden future:

First, the case for continued strong returns from China is undeniable. The country's manufacturing sector just grew at its fastest rate since 2004. Overall, the Chinese economy may be growing at over 10 percent. It's quite possible that when the final fourth-quarter numbers are in, China will have overtaken Japan as the world's number two economy. You just can't ignore that in a world that is elsewhere wracked by recession.

And few are ignoring it. Emerging markets returns made it onto the first business page of the New York Times. The Wall Street Journal declared that being out of emerging markets was as big a risk as being in them. (I haven't heard that phrasing since an infamous Fortune magazine headline in 2000 about why you needed to buy Cisco.) And in a classic case of performance chasing, emerging markets stock funds saw $75 billion of net new investment in 2009, while investors pulled out of funds investing in U.S. stocks.

But things don't have to play out the way everyone expects. The Chinese recovery has been built on some truly gargantuan stimulus spending by the Chinese government, and there some potentially nasty bubbles building, particularly in real estate. According to Bloomberg:

In Shanghai, prices for high-end real estate were up 54 percent through September, to $500 per square foot. In November alone, housing prices in 70 major cities rose 5.7 percent, while housing starts nationwide rose a staggering 194 percent.

As economist James Kwak points out in this excellent Baseline Scenario post, China's banking system has few checks and balances-other than the government itself, which has been urging banks to lend. It would be ironic, but not unprecedented, if China were to stimulate itself into a real-estate-fueled banking crisis less than a year after wagging its finger at the West for doing the same thing.

None of this proves that China won't have a great year, of course. And yes, you need to have international stocks in your retirement portfolio for a number of long-term reasons. But investment markets have a long record of confounding what everyone can see to be true. Best not to bet your future on China's manifest destiny. Being too clever with your retirement savings is a far bigger risk than being too humble.

Continue reading on CBS