First with Financial Comment from Arabia

King of shorting warns China is the next bubble to pop

with 6 comments

chinese-goods-waiting-to-be-shipped-for-export_7548Is China the next economic superpower or an overstimulated communist state on the verge of collapse? There are a growing number of China bears to counter the bulls.

The famous Enron short seller and billionaire hedge fund investor Jim Chanos is among the most credible of the bear pack. The argument is simply that China is hiding the truth about the impact of the global trade implosion on its economy this year, and that the economy is overheating, particularly its stock and real estate markets.

Enron whistleblower

In 2001 Chanos was one of the first to point out that the accounts from Enron were pure fiction as he told a congressional committee hearing the following year having made a fortune shorting the stock. Now he is shorting China.

Chanos is not alone. Author of ‘The Coming Collapse of China’ Gordon Chang recently highlighted the underperformance of the Chinese economy despite the $900 billion spent to prop up its $4.3 trillion economy this year.

Chang argues that China’s published accounts that do not add up, such as a surge in car sales and static petrol consumption. He thinks state companies could be buying and storing cars, or perhaps the numbers are just exaggerated.

The bears cite massive overcapacity in many sectors of the Chinese economy, and an accumilation of goods and products that can not be sold. What has happened to all those exports lost in the 25 per cent collapse of Chinese exports this year?

A report prepared earlier this year by Pivot Capital concluded: ‘We believe the coming slowdown in China has the potential to be a similar watershed event for world markets as the reversal of the U.S. subprime and housing boom.’

China crisis

Is this the bolt-from-the-blue that is going to destabilize global financial markets again? It is always highly dangerous when economic reality departs significantly from what markets are expecting as they then tend to take a sudden and excessively negative view.

This financial website has been highlighting the potential for a big slowdown in China for some time. Morgan Stanley’s Stephen Roach, who also got the US recession right, thinks it is coming (see this article).

We have also pondered how China could possibly be doing so well when Japan was so obviously the worst affected major economy by the global crisis (see this article). We have warned on a bubble brewing in Chinese assets (see this article); and of the ongoing global shipping crisis which must mean bad news for the world’s largest exporter, China (see this article).

Readers who want to follow the smart money on China, and not the latecomers to the Chinese party might consider some of the short emerging market ETFs. The problem is timing the Chinese unwinding which will not come with any warning!

But by way of a Chinese puzzle, try to solve this: how can the world’s biggest exporter be growing its economy in the year which has seen the biggest collapse in global trade in history? The biggest stimulus in history, perhaps, but what does that mean for the inflation of asset markets?


Written by Peter Cooper

November 11, 2009 at 10:58 am

6 Responses

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  1. well reports like this cause panic !! which causes economy problems…this guys should just shut up and things will get better

    Ed Note: don’t you think it is the economic reality that is the problem, what these guys do makes no real difference? If you shut up these guys the problem will only get bigger, so actually they might have a good impact as well!


    January 15, 2010 at 2:46 am

  2. A lot of people vacationed and speculated in Dubai. A whole lot of people LIVE in China. And the language, governments, and poverty, make leaving a bit difficult for most of them. China will have downturns, but will bounce back from them in a year or so. Everything will be OK until terminal oil decline causes the oil price to explode. That will screw up the entire world economy. My guess is sometime between 2016 and 2020. Can China maintain rapid growth with $300 oil? I doubt it. I sure hope that I’m around long enough to say that I was once again, wrong.

    Bill Simpson in Slidell

    December 21, 2009 at 1:41 pm

  3. From The Sunday Times today:

    Talking on the sidelines of the Asia Pacific summit, Donald Tsang, chief executive of Hong Kong, admitted openly that the dollar carry trade had started to spread and that the prospect “scared” him.

    Washington’s response to the recession, he said, ran the risk of emulating the behaviour of Japan after its bubble collapsed in 1989 and allowing overly loose policy and a rock-bottom cost of money to inflate asset bubbles around the world. “Gyrations in financial markets and bubbles in asset markets remain ahead of us,” he added.

    Hong Kong is perhaps closer to the new asset bubbles than others: house prices there have risen 28 per cent this year and new records for land price sales have landed with thudding regularity over recent weeks.

    Behind Mr Tsang’s concerns is the fixed relationship between the Hong Kong dollar and the “greenback” — the so-called dollar peg that is the cornerstone of Hong Kong financial policy but is forcing its interest rates to be much lower than the monetary authorities would like. Hong Kong’s property inflation is being driven by mortgages that are cheaper than they should be but the authorities are limited in how they can respond.

    Observers who have warned of the emerging dollar carry trade include Nouriel Roubini, the American economist.

    He believes that the prolonged ability to borrow dollars cheaply risks planting the seeds of the next financial catastrophe. Carry traders feel more comfortable with their positions because of the Federal Reserve’s promise to keep rates “exceptionally low” for an “extended period”, he said recently.

    Peter Cooper

    November 15, 2009 at 12:58 pm

  4. I’ve seen similar “empty” cities in China for the last 15 years. And over a few years, these cities have (so far) inevitably filled up.

    The Tsinghua professor quoted in the original news report is exactly right in that regard. All of the previous rounds of physical infrastructure in China has paid off economically and socially.

    There are two numbers which define China, and is far more important than GDP in any given year:

    1) population: 1.3 billion and counting.
    2) urbanization rate: 45% and climbing.

    China’s urbanization rate will rise to 70% by 2035. If you do the math, that means 325 million Chinese currently living in rural villages will move to urban cities within the next 25 years.

    And if you do the math again, that means:

    – for every square foot of real estate currently in existence in China… it’ll be doubled over the next 25 years.

    – it also means building 15 New York’s from scratch over the next 25 years.


    November 14, 2009 at 8:17 am

  5. Way different than Dubai before the crash. China has over a billion people that work, need homes,need cars,need clothes,need luxury items and the list goes on. Dubai had maybe 50,000 businessmen that came in and propped up property prices like a pyramid scheme and in the end when there were no takers everything came crashing down. In China there are plenty of takers locally and plenty of takers abroad for their products.

    At the end of the day numbers play a crucial role in demand.


    November 12, 2009 at 3:46 pm

  6. I just got back from Guangzhou a few days ago. The economy there does seem to be booming and you see new cars every where. Most hotels are book too and the expensive restaurants have pretty much no empty seats. It’s hard to deny that place is booming because it really is a booming place. The demand there for pretty much everything is pretty insane. You have local demand and demand for exports. All in all demand is pretty crazy. There are a lot of businessmen in China making a killing these days.

    Ed Note: bit like Dubai before the crash?


    November 11, 2009 at 8:36 pm

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