Is China the greatest investment opportunity in the world? Or is it a bubble?

It could be both, as the two often go hand in hand. A decade ago, the Internet represented the world's best opportunity but also its most precarious play.

Now, the China story is undeniably compelling. An economy of a billion people, many of whom are still living in rural poverty, swiftly being brought into the modern world of technology and trade. If growth comes from the liberation of human potential, then China may be the greatest growth story ever told.

Growth means change. Change means uncertainty. Uncertainty means difficulty in assigning rational value to investments. In the face of that difficulty, it's hard to resist letting the growth story sweep caution to the winds. Why not invest every penny in China, no matter what the price? Last week, China displaced Japan as the second largest economy in the world! How can you lose, if you're just patient?

Of course, in China's case, the investment thesis is not just a question of whether stocks are reasonably valued. No, when my institutional clients worry about China being a bubble, they're talking about China itself -- the county, the economy, not the stock market.

My clients worry that for all China's rush to modernity, it's still basically a totalitarian communist country. Its economy is directed -- some would say manipulated -- by a political elite that controls a vast web of state-owned banks and industries. It can dictate interest rates, exchange rates and capital controls. Indeed, with a wave of its hand, it can command whole new cities to be built where last year there was nothing but wilderness.

That's not an exaggeration. If you spend much time on the web, you've no doubt seen pictures of the "city to nowhere" in Inner Mongolia -- a huge, brand new modern city that was built on command -- but never occupied. You'd call it a ghost town, but it never lived. Its skyscrapers were never occupied, its roads never driven. And there it sits.

And so the skeptics ask: Is all of China's rapid economic growth is just an illusion? Building that empty city in Inner Mongolia employed millions of workers and consumed billions of dollars in materials. But it was all for nothing -- so maybe that growth didn't really exist.

I suppose you could say the same thing about all the "stimulus" spending here in America over the last year. We don't even have much growth to show for it. But that's another story for another column.

There's another interpretation. One China expert I know tells me you just have to write off the Mongolian city to the massive inefficiency of communist control of the economy. He says that some poobah in some bureaucracy decided that there needed to be a new provincial capital -- and so one was built. Then for some reason he changed his mind.

So that means you have to consider a trade-off when you invest in China. On one hand, there's that great growth story. Every time a farmer comes from the country and gets a job in a factory, that's growth. And there are a lot of farmers. But on the other hand, it's a totalitarian country, where colossal blunders will be made by those in control. You have to ask yourself why China can do a better job with a command-and-control approach to the economy than the Soviets did. The resolution is a happy one -- because China is liberalizing, giving up more and more control to firms and individuals, and letting people get rich in the process. The USSR never did that. But that process has a long way to go, and along the way there will be massive inefficiencies.

What's more, the inefficiencies and the liberalization have strange and dangerous interaction effects. Consider the Chinese real estate market. You hear all the time that it's a bubble of even more epic proportions than the sub-prime bubble in the U.S. a couple years ago. When it bursts, it's going to be all over for China -- or so the story goes.

A friend of mine, Michael Kurtz, is stationed in China as a strategist for the global securities firm Macquarie, and he thinks the Chinese real estate market both is and is not a bubble. He published some of his thoughts in a recent commentary for the Asian edition of The Wall Street Journal. Read the whole thing. It's fascinating stuff.

Mike notes the story going around that there are supposedly 65 million vacant residential units in China. Combined with the massive ongoing bull market in housing prices, on the face of it there would appear to be a massive overinvestment -- a bubble just waiting to burst.

But Mike thinks maybe it's a rational bubble, and he sees reasons why it may not burst for a long time. In China, personal income taxes are very low. Government gets revenues by controlling interest rates at very low levels -- and forbidding citizens to invest outside the country. Those low rates are a subsidy for state-owned companies who get to borrow money on the cheap, and they in turn pay heavy taxes.

So the rational Chinese citizen buys real estate, both for his own housing and as an investment. And it's no tragedy if his investment units are unoccupied and generating no rent because there are no property taxes. So why not?

The worst thing that happens is you wait a couple years until another hundred million farmers migrate into the city to work -- and all of a sudden you've got plenty of renters generating income for you. In the meantime, what else did you have to do with the money anyway?

See? It's a rational bubble. And there's no reason why it should burst unless China suddenly changes all the rules that make it rational in the first place. Is China going to do that? Is it suddenly going to impose big income taxes on its citizens? Mike doubts it -- if it did, then those citizens might actually demand a voice in government. And China's just not ready for that much liberalization.

For Mike the worst problem is that the rational bubble ends up being a barrier to political maturation. Even if China wanted to liberalize more fundamentally, would it risk a housing-led recession by pulling the rug out from under that critical store of wealth for tens of millions of its citizens?

It's like I said. China is the greatest investment opportunity in the world. And it's a bubble. Both.