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starbucks4ever (98.98)

Contrarian Investor Sees Economic Crash in China

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January 09, 2010 – Comments (16)

 

"James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true.

Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc.

As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China's hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like "Dubai times 1,000 -- or worse," he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent. 

"Bubbles are best identified by credit excesses, not valuation excesses," he said in a recent appearance on CNBC. "And there's no bigger credit excess than in China." He is planning a speech later this month at the University of Oxford to drive home his point.

As America's pre-eminent short-seller -- he bets big money that companies' strategies will fail -- Mr. Chanos's narrative runs counter to the prevailing wisdom on China. Most economists and governments expect Chinese growth momentum to continue this year, buoyed by what remains of a $586 billion government stimulus program that began last year, meant to lift exports and consumption among Chinese consumers. " http://finance.yahoo.com/banking-budgeting/article/108534/contrarian-investor-sees-economic-crash-in-china;_ylt=AhT_w.oPGtKgrbF9_vlSt81O7sMF;_ylu=X3oDMTFhMnE0OWVwBHBvcwMyBHNlYwNzcGVjaWFsRmVhdHVyZXMEc2xrA2NvbnRyYXJpYW5zZQ-

16 Comments – Post Your Own

#1) On January 09, 2010 at 3:28 PM, ChrisGraley (30.25) wrote:

Shhh, Chinese housing bubble in 3..2..1..

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#2) On January 09, 2010 at 3:52 PM, camistocks (< 20) wrote:

from the article: "I find it interesting that people who couldn't spell China 10 years ago are now experts on China," said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. "China is not in a bubble."

Colleagues acknowledge that Mr. Chanos began studying China's economy in earnest only last summer and sent out e-mail messages seeking expert opinion.

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#3) On January 09, 2010 at 4:35 PM, FreeMortal (29.62) wrote:

China could very well be in bubble mode right now.  The problem we have now is determining even a ballpark idea as to when.  With an opaque government that has little accountability to the governed and exercises absolute control over monetary policy, the jig could be up tomorrow or it could take another decade. 

There would have to be some sort of catalyst to make this happen. If China was near the brink two years ago, the financial crises in the US would have sent them tumbling over.  So far, China seems to have shrugged it off.  Perhaps the Chinese government is just really, really good at keeping up the facade.  In that case there is no telling when, or where, the bubble will burst.

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#4) On January 09, 2010 at 5:38 PM, starbucks4ever (98.98) wrote:

FreeMortal,

My understanding is that China was in a winning position when the crisis started. Why they decided to give away every trump card they had, is beyond my comprehension. I would explain it by stupidity for lack of a better explanation. Once they decided to hold 2 trillion worth of toxic T-bills instead of selling them, I knew that their economic fate was sealed. I agree with Chanos and see a huge economic crash in a near future as all but inevitable.  

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#5) On January 09, 2010 at 6:42 PM, FreeMortal (29.62) wrote:

When you say "near future" do you mean 6 mos?   A year? Why have you become worried now as opposed to a year or so ago?

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#6) On January 09, 2010 at 8:54 PM, starbucks4ever (98.98) wrote:

To me, "near future" means like 2-5 years. I am worried now because it's become clear that Chinese government has no clue how to run a modern economy and is fully determined to follow merchantilist policies that wave worked so "well" in Japan.

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#7) On January 09, 2010 at 11:44 PM, whereaminow (42.76) wrote:

zloj,

RIght on.  I opt for renaming the Chinese Communist Party the Chinese Mercantilist Oligopoly.  That would be more fitting.

I disagree with Rogers as well, though I have great respect for him. I don't understand why anyone would pick China over India as the next great economic power. India has a well educated society, better medical services, better schools, a multiparty political system, just as large a population, etc.  Also China's government just built a city that no one lives in. Not just a building or a neighborhood... a whole freaking city.

I worry that China's GDP growth is as illusory as the USSR's was in the 1950's, when Keynesian hero (and Krugman mentor) Paul Samuelson looked at the numbers and declared that the USSR would be more productive than the U.S. one day.  When it didn't happen he protested, "how could I have known the numbers were phoney?"  It's called skepticism, Paul. (Also called Denialism nowadays, or whatever the Envirowackos are calling it.)

Rogers made the China call quite a long time ago, and even moved his family out there, I believe.  It's unlikely that he can ever admit he was wrong. (Scary thought for those of us that have long looked to him for advice.)  I wouldn't mind hearing him give an honest breakdown of the India vs. China debate.

(Also, a lot Indians are in West Africa right now making bank now that it has been relatively peaceful there for a few years - knock on wood. They are consumate traders.  Gotta love their guts.)

David in Qatar

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#8) On January 10, 2010 at 12:17 AM, starbucks4ever (98.98) wrote:

"I worry that China's GDP growth is as illusory as the USSR's was in the 1950's, when Keynesian hero (and Krugman mentor) Paul Samuelson looked at the numbers and declared that the USSR would be more productive than the U.S. one day."

Such failures of extrapolation models often happen, especially when you have an economy that produces more and more steel to build more and more steel-producing factories. At first things work very well. Then they work OK. And then they stop working and you wind up with some huge number of kilograms of steel per capita, and with precious little to show for that achievement in the way of living standards. I think I read somewhere that investment makes something like 35% of their GDP. Cannot be sure about the number, but I do remember it was shockingly high. 

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#9) On January 10, 2010 at 12:57 AM, hhasia (62.43) wrote:

What a load of rubbish.  This is what happens when the "western mindset" is applied to Asia.  The western mindset does not work, period.  How many time do people need to be informed. China is a planned economy, Not, free market.  One cannot compare the western model nor fit it to Asia.  See HHASIA blog Open Secrets of Emerging Markets. Armchair analysis from folks who do not live here... need I say more?. This kind of propoganda is put out there to try and move the markets, a ploy. The opposite of pump and dump. He wants folks to buy into his nonsence so he can profit. But he is wrong and momentum is against him, as well as facts. The earnings for 4th quarter China will be strong. I agree with Rogers, there is no bubble.

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#10) On January 10, 2010 at 2:32 AM, FreeMortal (29.62) wrote:

I don't think anyone here is making the assertion that China is a free market.  Thats part of the reason why we are skeptical.  Historically, planned economies don't have a great track record, especially on a large scale.  Whats worrying (at least to me) is that China's accelerating growth does not necessarily imply prosperity or profitability. Do we just assume that demand will simply appear to meet whatever is supplied?  For all we know, China's rapid growth could be from the production of goods that will never be used. If that is the case, then normal indicators of healthy growth like increased power consumption are completely worthless. 

4th quarter earnings may be strong, and the quarter after that, and the next. The thing is, if there were a bubble forming right at this moment, how could we possibly know when the entire economy is closely managed by a secretive government with limited accountability? Do we just take their word for it? 

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#11) On January 11, 2010 at 10:35 AM, hhasia (62.43) wrote:

I can appreciate the skeptic, so Freemortal here are a few tips.

Profit is not part of the equation, and neither are losses. Losses are absorbed at the central Govt level, not at the market level. Profits are attributed at the market level.

The plans are not that secret. Each day initiatives by industry sector are reported in China Daily, among other publications. 

Just Dec 7, the central bank raised rates, to cool things down a bit in the banking sector. In the property sector for the main cities, the down payments are 35-40%. Loans are not secured by the properties!, So if someone want to purchase a house, it must be secured by assets other than the house being bought.(Unlike the US.)  There is no, non-recourse financing in China.

 

 

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#12) On January 11, 2010 at 10:53 AM, russiangambit (29.49) wrote:

> I disagree with Rogers as well, though I have great respect for him. I don't understand why anyone would pick China over India as the next great economic power. India has a well educated society, better medical services, better schools, a multiparty political system, just as large a population, etc.  Also China's government just built a city that no one lives in. Not just a building or a neighborhood... a whole freaking city.

#7 - India seems to be completely disfunctional, somewhat like midieval Germany, they have no central theme, every  region pulling in its own direction, democaracy at its finest.  On top of it nothing can get done because of corruption.

Plus, it seems India simply doesn't have enough resources -   too many people for too little land. India could probably do better separated into several states each with its own agenda.

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#13) On January 11, 2010 at 10:58 AM, russiangambit (29.49) wrote:

#11 -  we have somewhat similar situation in Mosocw, there is hardly any credit availble yet the price of housing has been rising exponentially for the past 10 years. In case of Moscow it is not so much a bubble as it is a case of demand. There is huge inflow of population from other regions into Moscow. In the USSR times one had to have a permission to live in Moscow, a residency permit. Now anybody can live there as long as you can afford it.

Is it the same situation in China, the inflow od population from villages into cities that drives prices up? Otherwise it is hard to see how it is not a bubble when prices rise much faster than incomes.

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#14) On January 11, 2010 at 11:48 AM, outoffocus (23.59) wrote:

I agree that China may be headed for a crash.  So far every argument I've heard about China's real estate bubble makes sense.   However I still believe that China is what the US was in the early 20th century.  Just because China may crash temporarily doesnt meant that there isnt still tremendous growth opportunities in China. Lets not forget that the US stumbled a few times before we rose to the top.  From a long term perspective, a crash would be a good thing because we would be able to buy up China assets at fire-sale prices.  Only common people look at a crash as a bad thing.  True investors see crashes as opportunties.

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#15) On January 11, 2010 at 12:01 PM, starbucks4ever (98.98) wrote:

outoffocus ,

Yes, is the country is still around after the crash, you can profit handsomely.  

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#16) On January 11, 2010 at 12:19 PM, FreeMortal (29.62) wrote:

#11 "Profit is not part of the equation, and neither are losses. Losses are absorbed at the central Govt level, not at the market level. Profits are attributed at the market level."

Not sure I understand that.  If losses are absorbed by the government, what prevents Chinese companies from taking excessive risks?  How is profit not part of the equation, what is the incentive?

#12 I see the same thing with India.  They are so democratic that it is paralyzing.  Incumbents are bound to their election cycles and the electorate is so fragmented that officials usually serve a narrow minority (and appoint their family members to key positions).  The religious tensions keep flaring up and their neighbor Pakistan is a real wild card at this point. Then there is the whole corruption thing.  (Yes I know, as a Yankee I don't have much room to talk)

At least with China, we can expect their government to take a (very) long term view and more-or-less stick to it because accountability goes only one way (up rather than down) and they don't have to worry so much about being voted out of office.  It could possibly take the country off a cliff though, as totalitarian governments generally don't ever acknowledge economic weakness until its far too late. If that is their destiny, it will be something like the coyote walking ten steps off the cliff in mid air before realizing his mistake and plummeting.

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