Contrarian Investor Predicts Economic Crash in China
nytimes.com
nytimes.com
One story I remember is that the so-called scientists of the Communist regime claimed they had produced a new way to grow wheat so that it was much denser, both as a way to prove the superiority of the Communist system vs. Western capitalism, and as a way to head off any rumors of famine.
This wheat was so dense, the Chinese government claimed, one could stand on top of the wheat field without falling to the ground.
In the book was an old black and white photo of two Chinese children apparently doing just that: standing on top of a wheat field. But the caption explained that actually there was a step ladder underneath them placed there to produce the illusion.
I'm not trying to draw any parallels between the above story and the linked article, besides the fact that the latter made me remember the former.
It's hard to say whose economy is most like that wheat field these days.
That's quite likely, actually, given the lack of transparency in Chinese internal politics and the lack of access of independent journalists to the relevant data.
Those last two are the most closely related to the massive property bubble in China and are also the reason the stock market is so volatile: companies own land and they own each other and that dynamic leads to a virtuous cycle of increasing market capitalization in good times, and collapsing valuations when valuations fall. Small price changes can have a disproportionate effect on market capitalization.
My business teaches Chinese online (http://popupchinese.com) from Beijing, so we're face to face with the economic reality here. And while everyone knows there's a bubble in real estate (it's on television every night), when you adjust Chinese GDP to account for purchasing power parity and adjust to the wage scale, the Chinese economy looks much, much bigger and more important than it seems if you're looking from an American perspective. Anyone who hasn't had the chance to visit yet definitely should! And start learning Chinese too.
Incidentally, a number of studies on Chinese energy use have cast doubts on its rate of growth for years. Still doesn't mean that the Chinese economic miracle isn't the story of the century.
PS: For comparison look at South Korea even though it's slowed down from 1995 to now it still grew ~300x from 1965-now compared to China's ~70x growth over the same period.
"According to our own proprietary Chinese GDP indicator, in December Chinese growth could have been 13 percent."
Until then this guys guess is as good as the rest. Remember the story about the monkey and the dartboard vs the analysts.
http://www.investorhome.com/darts.htm
Analyzing economies as a whole is even more perilous and error prone.
China is probably together with India positioned to create internal growth more than other places on the planet, whether or not they will succeed is a question that nobody has the answer to yet.
So, to counter the contrarian investor I predict it will go the other way round, we'll see who is right.
But on the off chance that I am don't take that as anything other than luck.
I agree with your assessment of the difficulty of macroeconomic analysis. But it sounds like his details are more specific than that.
I wonder if there are more interesting plays here; are there invest-able vehicles that we have access to that are going to do well if China does well AND if it does badly? I wonder if WMT would reap a profit either way.
So, will you bet that it will go down? Name your price.
I've never formally analyzed my investment performance, but to date I've made roughly 20% of my total income over the past 15 years on investments, both in stocks and in start-ups. I've lost about half of that due to failed investments.
If I would be more risk averse and less inclined to give people chances then I probably would have done a lot better than that but that's my nature.
edit: re: > are there invest-able vehicles that we have access to that are going to do well if China does well AND if it does badly?
That depends mostly on what effect Chinas doing will or badly will have on the world currency market. There is a lot of money to be made in a falling market but the timing is very difficult, much more so than in a rising market.
In a rising market you may limit your profit if you mistime, in a falling market you can easily lose your shirt.
"Stocks have reached what looks like a permanently high plateau."
My point is, economies have cycles and China won't be able to avoid its fate either. I don't know if it's going to happen tomorrow or in 20 years but I'm sure as hell that it is going to happen. The important question is not whether it is going to happen but if they're going to be able to recover from it eventually and honestly, I'm not sure if their opaque economic/political/social system will help them. In my view one of the reasons behind the West's wealth is that it always managed to recover eventually after economic / social meltdowns, one way or other.
I'm no economist though, these are only my deductions based on my understanding of human history.
If you are wrong, wait a little longer and voila, now you are right.
Anybody can predict the long term fall of any economic system, but the only interesting question when it comes to stuff like this is what it is going to do on the next trading day and there are companies that have spent small fortunes and that are not much closer to answering that than they were when they started out.
'The Oracle' or 'The Golden Hand' is the goal of every investor, and if anybody ever would figure out how to do that and play the market long enough they would find that market changing to the point that it no longer worked.
China does not have much experience in this field so far, the people in power are scared to death (sometimes literally) of what would happen if the general population managed to get enough power to rise up against them.
How China will respond to their (inevitable, in the longer term) economic crashes remains to be seen.
So far the accent seems to be (even in relatively good times) on the control of the flow of information, which according to a German theorist in world war II was the means to controlling the people. It proved to be mostly right.
But in this day and age it is not so simple to control the flow of information. If China would be covered by a mesh wireless network then no single firewall is going to stop people from communicating.
In the former eastblock this was done slowly by Samizdat press, today that would probably be encrypted communications on wifi.
What will happen once those final barriers dissolve is anybodies guess, but that could be quite a while off.
Technically speaking the means have been in place since '95 or so, from what we can see that has not caused major upheavals. (the same goes for Iran, last year, in spite of a strong effort at it)
So I'm thinking that the same rules that apply to our society apply to the Chinese one, as long as the economy isn't doing too bad the people in power will be given more time, if there ever would be a major famine due to crop failure or some other 'act of God' then you can expect all kinds of trouble.
Seems equally as likely the growth of surrounding economies could be the result of Chinese regional spending and an indicator of financial mismanagement as it is an indicator of some underlying health.
This seems completely wrong. Here's a large-volume and presumably shortable ETF with Chinese holdings:
http://finance.yahoo.com/q?s=FXI
If I remember, I'll try to put a short order on it in the morning to see if I'm right. Not sure how the Times and Chanos could say something so incorrect tho'.
http://seekingalpha.com/article/119316-double-and-triple-etf...
The only difference with the leveraged instruments is the corresponding loss is greater. But that's the whole point of using leverage -- the gain is greater, too.
Investopedia explains Shanghai Stock Exchange Two main classes of stock for every listed company are traded on the exchange: A-shares and B-shares. B-shares are quoted in U.S. dollars, and are generally open to foreign investment. A-shares are quoted in yuan, and are only available to foreign investment through a qualified program known as QFII.
http://www.investopedia.com/terms/s/shanghai-stock-exchange....
But keep that in mind. The average result of a Chanos bet is that the entity in question goes up less than the rest of the market, not that it goes down.
Also, the government is pumping money into infrastructure - dams, roads, tollgates, hospitals. No matter what crashes, the infrastructure remains.
China will hit crisis like all economies do - but I do not think it will be in real estate.
If most investors were predicting a crash, then the ones predicting growth would be contrarians, and you could write an article about them.
Doom and gloom always gets a higher page count, though.