ArabianMoney.Net

First with Financial Comment from Arabia

Responding to Thomas L. Friedman’s attack on shorting China

with one comment

It is curious to read Thomas L. Friedman’s attack on shorting China as a valid current investment strategy. He is appalled to hear that the ‘King of the Shorts’ Jim Chanos is shorting the Chinese economic miracle (see this video).

Friedman did not make billions shorting US sub-prime loans like Mr. Chanos, nor did he warn on Enron (and make a fortune shorting its stock). Successful investors seem better placed to make tips than a Pulitzer Prize winning author and a highly respected Middle East correspondent whose fortune is comparatively modest.

That said Mr. Friedman commands a huge readership for his twice weekly column in the New York Times, and what he says clearly carries some weight. So why is he against shorting China?

Anti-short case

First, he says ‘never short a country with $2 trillion in currency reserves’. Fine but in the case of China that is only $1,600 per capita. And if you have been spending on a stimulus plan equivalent to half your GDP in the previous year things can clearly not go on like this forever.

Second he cites and dismisses the relevance of China’s ‘enormous problems’ including ‘low interest rates, easy credit, an undervalued currency and hot money flowing in from abroad’. That is indeed the immediate source of the 29 per cent growth in the money supply and the bubbles in the stock market and housing.

But Mr. Friedman is viewing China through the looking glass of Wall Street rather than getting down to the economic fundamentals of an over-expanding emerging economy where the next phase in the business cycle is an unavoidable and massive slump.

It is much easier sat in Dubai as a long-standing correspondent of this city to understand how that can happen. Booms will go bust, and the bigger the boom, the bigger the bust.

Exports crash 16%

Why does Mr. Friedman imagine that the Chinese have pumped such a huge amount of money into their economy over the past year? It is for one reason: the export machine that made China rich has suffered a massive contraction in demand. Chinese exports fell by 16 per cent last year, and that really hurts if exports amount to 38 per cent of GDP.

The real problem for China now is that you cannot actually brush such a huge business crash under the carpet without economic consequences. Those consequences are the massive bubble in stock and housing prices, and the correction from a liquidity driven asset boom is generally a vertical down.

Longer term this might just appear as a big blip on the chart of the long upward march of the Chinese economy, or it might be a correction back to the reality of a very poor country whose economic policy has run horribly out of control. My guess would be somewhere in between, with a shorting opportunity of the century.

Advertisements

Written by Peter Cooper

January 17, 2010 at 9:00 am

One Response

Subscribe to comments with RSS.

  1. Hi Peter,
    Not sure if you have read this Chine report from Pivot CM that was referenced.

    http://www.pivotcapital.com/reports/Chinas_Investment_Boom_the_Great_Leap_into_the_Unknown.pdf

    very well argued, referenced, data backed case regarding the bubble in China.
    Won’t give you the exact date unfortunately!
    Carries a bit more weight than an opinion of a professional opinion maker, based on the opinion of others – in my opinion!
    Love the blog

    sandman

    January 17, 2010 at 8:52 pm


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: