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Short sellers home in on China
14 Jan 2010, 0309 hrs, Bloomberg
It’s good to be sceptical when virtually every major economist agrees on something.
As the Great Recession wanes, there’s no better example of the Great Consensus than China. The overwhelming view is that it can grow 10% indefinitely, its potential is boundless and it’s run by omnipotent geniuses who can’t lose. China is today’s New Economy and anyone who disagrees just doesn’t get it.
That sounds familiar to those who bought into America’s New Economy in the 1990s. Call it China.com. Things didn’t end well for the dot-coms, so how about China’s $4.3-trillion economy?
Enter hedge-fund manager Jim Chanos, whose views about a Chinese crash are making headlines. Perhaps it’s not surprising that an investor who has flagged numerous accounting frauds, including Enron, is examining China’s books.
As fanciful as it sounds, don’t rule out trouble in China. Just 20 years ago, the herd was convinced of Japan’s invincibility. Today, Japan Airlines’ expected bankruptcy reminds us of the blind bullishness on a nation’s prospects.
$10 Equals $20
Let’s say the Economist’s Big Mac Index is right and the yuan is almost 50% undervalued. That means when China buys $100 billion of US Treasuries, it’s paying almost twice as much.
It’s like buying $10 bills with $20 bills, squandering piles of state money and, in the process, worsening inflation risks. It helps exporters, but holds back the economy’s development.
If China were a hedge fund, it wouldn’t be in business very long. When China says it’s growing 10%, it’s still hard to know how much reflects Enron-like siphoning of stuff on the national balance sheet and putting it on the income statement.
Hence, the interest of hedge-fund types such as Chanos. The head of Kynikos Associates in New York has become perhaps the most outspoken critic of China’s economic figures and balance sheet. He was profiled in the New York Times on January 7. Those who want to dismiss such views, as wildly contrarian as they are, should consider another name: Ezra Vogel. Thirty years ago, Vogel wrote one of the most talked-about books of the time, “Japan as Number One.” It argued that this tiny island nation was destined to dominate the economic world.
Japan’s Example
Such predictions swept through corporate boardrooms with great ferocity in the 1980s, a time when the biggest banks measured by deposits were all Japanese. Members of Congress talked about the US becoming a colony of Japan. Purchases of Rockefeller Center, Universal Studios and Pebble Beach golf course had commentators buzzing about a commercial Pearl Harbor.
14 Jan 2010, 0309 hrs, Bloomberg
It’s good to be sceptical when virtually every major economist agrees on something.
As the Great Recession wanes, there’s no better example of the Great Consensus than China. The overwhelming view is that it can grow 10% indefinitely, its potential is boundless and it’s run by omnipotent geniuses who can’t lose. China is today’s New Economy and anyone who disagrees just doesn’t get it.
That sounds familiar to those who bought into America’s New Economy in the 1990s. Call it China.com. Things didn’t end well for the dot-coms, so how about China’s $4.3-trillion economy?
Enter hedge-fund manager Jim Chanos, whose views about a Chinese crash are making headlines. Perhaps it’s not surprising that an investor who has flagged numerous accounting frauds, including Enron, is examining China’s books.
As fanciful as it sounds, don’t rule out trouble in China. Just 20 years ago, the herd was convinced of Japan’s invincibility. Today, Japan Airlines’ expected bankruptcy reminds us of the blind bullishness on a nation’s prospects.
$10 Equals $20
Let’s say the Economist’s Big Mac Index is right and the yuan is almost 50% undervalued. That means when China buys $100 billion of US Treasuries, it’s paying almost twice as much.
It’s like buying $10 bills with $20 bills, squandering piles of state money and, in the process, worsening inflation risks. It helps exporters, but holds back the economy’s development.
If China were a hedge fund, it wouldn’t be in business very long. When China says it’s growing 10%, it’s still hard to know how much reflects Enron-like siphoning of stuff on the national balance sheet and putting it on the income statement.
Hence, the interest of hedge-fund types such as Chanos. The head of Kynikos Associates in New York has become perhaps the most outspoken critic of China’s economic figures and balance sheet. He was profiled in the New York Times on January 7. Those who want to dismiss such views, as wildly contrarian as they are, should consider another name: Ezra Vogel. Thirty years ago, Vogel wrote one of the most talked-about books of the time, “Japan as Number One.” It argued that this tiny island nation was destined to dominate the economic world.
Japan’s Example
Such predictions swept through corporate boardrooms with great ferocity in the 1980s, a time when the biggest banks measured by deposits were all Japanese. Members of Congress talked about the US becoming a colony of Japan. Purchases of Rockefeller Center, Universal Studios and Pebble Beach golf course had commentators buzzing about a commercial Pearl Harbor.
