Chanos on Chinese Economy, Asset Bubbles

The econogurus fight all the time. Here's what's happened recently.

James Chanos, president of Kynikos Associates Ltd., who has become a billionaire from short-selling, spoke at the London School of Economics Alternative Investments Conference on January 25 and made an hour-long presentation at Oxford University’s China Center on January 28.

Watch the videos:
Talk at LSE
Presentation at Oxford

I am amused that Jim Rogers, a gigantic China bull chimed in, basically calling Chanos a China neophyte.

I find it interesting that people who couldn’t spell China 10 years ago are now experts on China

Then came NY Times columnist Thomas Friedman. Still I find his comments quite amusing. To read the whole article, click here.

China’s markets may be full of bubbles ripe for a short-seller, and if Mr. Chanos can find a way to make money shorting them, God bless him. But after visiting Hong Kong and Taiwan this past week and talking to many people who work and invest their own money in China, I’d offer Mr. Chanos two notes of caution.

First, a simple rule of investing that has always served me well: Never short a country with $2 trillion in foreign currency reserves.

Second, it is easy to look at China today and see its enormous problems and things that it is not getting right. For instance, low interest rates, easy credit, an undervalued currency and hot money flowing in from abroad have led to what the Chinese government Sunday called “excessively rising house prices” in major cities, or what some might call a speculative bubble ripe for the shorting. In the last few days, though, China’s central bank has started edging up interest rates and raising the proportion of deposits that banks must set aside as reserves — precisely to head off inflation and take some air out of any asset bubbles.

And that’s the point. I am reluctant to sell China short, not because I think it has no problems or corruption or bubbles, but because I think it has all those problems in spades — and some will blow up along the way (the most dangerous being pollution). But it also has a political class focused on addressing its real problems, as well as a mountain of savings with which to do so (unlike us).

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But, hey, some people said the same about Enron. Still, I’d rather bet against the euro. Shorting China today? Well, good luck with that, Mr. Chanos. Let us know how it works out for you.

To be honest, I don't follow Mr. Friedman's reasoning.

Later, Friedman got some professional help from analyst Jonathan Anderson at UBS. To read the full article at WSJ, click here.

The latest to join in piling on Chanos is Jonathan Anderson, the respected emerging-markets economist for UBS and a longtime China watcher. In a report this week, Anderson deployed an impressive array of charts to make the point that “China looks nothing like Dubai.” While Dubai had rapid growth in bank lending and property deals for several years before its bubble burst, he says, China hasn’t had those symptoms until that last 12 months or so - and the government is already trying to cool things down.

Rather than looking like Dubai on a continental scale, China is having more of a “mini Dubai moment,” Anderson argues. Things are going to slow down this year, which means that “‘big China bears’ could easily look like heroes for a while during 2010,” he says, “even if their more dire predictions are proven very wrong at the end of the day.”

Alrighty, I am glad that these folks have such a strong confidence in China's economy, more than I have obviously.

IMHO, Soros is learned in the ways of the world. Soros sheds further light on why he can fearlessly buy 'bubbles', in an interview with a Chinese media. Check out the full interview here.

Looking back at the past year's responses to the global financial crisis, Soros says lending by Chinese government-owned banks was indeed excessive, but that regulatory decisions to adjust reserve ratio requirements were appropriate.

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Soros: People see bubbles everywhere. Again, there is no question the financial stimulus has pushed up asset prices. Whether that is a bubble or not actually depends on whether it's going to be a hard landing or a soft landing. If it is a soft landing, then it is not a bubble. If it is hard landing, it will be a bubble. We'll only know if it's a bubble or not later.

So it's quite on the back of the Chinese government. Let's see how things are going to play out.