I have ignored reasons that might justify lower discount rates or higher GDP adjustments for China mainly because the purpose of this essay is to explain why the U.S. multiple is so much higher than China's, and of course these reasons exist, but I think whatever the correct ratio should be, there is no question that advanced economies always justify higher multiples than developing economies because they tend to be economically more diversified and politically more
stable, and they usually have institutions, including clearer legal and regulatory
frameworks, more sophisticated capital allocation processes, less rigid financial systems, and smaller state sectors (which
make smooth adjustment, one of the most valuable and undervalued components of long - term growth, more likely).
The sand grains stack up to
make the quicksand look like a
stable surface, but the whole
framework will suddenly collapse under even minute pressure.