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China Economy and Stock Market Crash Warning From Hedge Fund Manager

Economics / China Economy Jan 10, 2010 - 10:47 AM GMT

By: Trader_Mark

Economics

Best Financial Markets Analysis ArticleThis is not a new position for legendary short selling oriented hedge fund manager (who smoked out Enron) Jim Chanos, but he continues to pound the table on the dangers of China. [Dec 16, 2009: CNBC Video - Hedge Fund Maven Jim Chanos on Autos, Banking, and China]  It's a tough environment to be short anything globally; I assume he is taking some pain even in his anti automotive parlays.


As for China, while the positive story is obvious for the next 10, 20, 30 years, I have some serious concerns on what the effects of the misallocation of credit from the tsunami of bank lending that arrived in first half 2009 will be.  [Feb 16 2009: Is China Pulling an Alan Greenspan?]  But as we saw in the US early to mid decade - those short term "solutions" can take a long time to manifest their eventual evil. And between the here and now, and the eventual fallout you can see huge moves against you (think housing bubble mid decade or tech bubble late 1990s).  [May 27, 2009: How is China Spending Their Stimulus? ... and How Many Loans will go Bad?]  Chanos is concerned at an even larger level than just this subset of loans - he is worried about the whole China Inc situation - as he calls it.

 

Eventually I think Chanos could be very right; but standing in front of a freight train is something I'll leave to others more brave than I.  As with all bubbles (a now much over used word) you can identify them early but it is almost a penalty to be ahead of the herd - since the herd tends to trample you - before they themselves jump off the cliff en masse. Instead, we'll remain very aware that there will be some serious fallout from this flood of loans to all parts of the Chinese economy, and as we get closer to when these bad loans should start falling apart - have it more front and center on our radar.  I'm thinking this is more of a 2011-2013 event.

Either way you can see this now global adoptation of Alan Greenspan's way, is going to lead to a very hectic decade again as cycles of central banker "easy money" led booms and busts envelop multiple countries who have followed his playbook.  China itself has already said it has overcapacity in multiple industries, but continues to build.  The fallout should be interesting; I expect another decade where "buy and hold" is going to disappoint people.

Via New York Times:
  • 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.   [Aug 5, 2009: China's Provincial Growth Figures Far Overstated versus National Figures]
  • 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.”
  • 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.
  • Still, betting against China will not be easy. Because foreigners are restricted from investing in stocks listed inside China, Mr. Chanos has said he is searching for other ways to make his bets, including focusing on construction- and infrastructure-related companies that sell cement, coal, steel and iron ore.
  • Mr. Chanos, 51, whose hedge fund, Kynikos Associates, based in New York, has $6 billion under management, is hardly the only skeptic on China. But he is certainly the most prominent and vocal.
  • For all his record of prescience — in addition to predicting Enron’s demise, he also spotted the looming problems of Tyco International, the Boston Market restaurant chain and, more recently, home builders and some of the world’s biggest banks — his detractors say that he knows little or nothing about China or its economy and that his bearish calls should be ignored.  “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.  But he is tagging along with the bears, who see mounting evidence that China’s stimulus package and aggressive bank lending are creating artificial demand, raising the risk of a wave of nonperforming loans.
  • “In China, he seems to see the excesses, to the third and fourth power, that he’s been tilting against all these decades,” said Jim Grant, a longtime friend and the editor of Grant’s Interest Rate Observer, who is also bearish on China. “He homes in on the excesses of the markets and profits from them. That’s been his stock and trade.”
  • “The Chinese,” he warned in an interview in November with Politico.com, “are in danger of producing huge quantities of goods and products that they will be unable to sell.”   In December, he appeared on CNBC to discuss how he had already begun taking short positions, hoping to profit from a China collapse.
  • The nation’s huge stimulus program and record bank lending, estimated to have doubled last year from 2008, pumped billions of dollars into the economy, reigniting growth.  But many analysts now say that money, along with huge foreign inflows of “speculative capital,” has been funneled into the stock and real estate markets. (meanwhile, "this analyst" has been saying that for the entire year of 2009)  A result, they say, has been soaring prices and a resumption of the building boom that was under way in early 2008 — one that Mr. Chanos and others have called wasteful and overdone.
  • Friends and colleagues say Mr. Chanos is comfortable betting against the crowd — even if that crowd includes the likes of Warren E. Buffett and Wilbur L. Ross Jr., two other towering figures of the investment world.
  • A contrarian by nature, Mr. Chanos researches companies, pores over public filings to sift out clues to fraud and deceptive accounting, and then decides whether a stock is overvalued and ready for a fall. He has a staff of 26 in the firm’s offices in New York and London, searching for other China-related information.

By Trader Mark

http://www.fundmymutualfund.com

Mark is a self taught private investor who operates the website Fund My Mutual Fund (http://www.fundmymutualfund.com); a daily mix of market, economic, and stock specific commentary.

See our story as told in Barron's Magazine [A New Kind of Fund Manager] (July 28, 2008)

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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