In my opinion, this is the biggest potential story out there right now. The mere possibility that the China bears are right and that all of the growth there is smoke and mirrors could have cataclysmic consequences on a global scale, nowhere more so than here in Debtland, USA.
If China collapses, what are the effects on our Treasury’s attempts to finance and refinance our way to economic health? And what would this mean to the world’s commodity prices, infrastructure projects and shipping/ transport industries?
We all know the bull case for China: The world’s most populous nation is going from third world to first world overnight, the burgeoning middle and upper class are buying, building and spending like there’s no tomorrow to make up for decades of communist deprivation.
Not many are familiar with the bear case for China, but the number of adherents to this story is growing.
The China bears include James Chanos, the billionaire hedge fund manager of Kynikos Associates that made his name and his fortune calling BS on Enron at the beginning of this decade. He shorted it to zero when his homework told him it was a fraudulent disaster waiting to happen. He referred to Enron as a Trust Me story. He now talks about China as the ultimate Trust Me story.
The linchpin bear argument is laid out fairly succinctly on Politico.com:
First, they point to the enormous Chinese economic stimulus effort — with the government spending $900 billion to prop up a $4.3 trillion economy. “Yet China’s economy, for all the stimulus it has received in 11 months, is underperforming,” Gordon Chang, author of “The Coming Collapse of China,” wrote in Forbes at the end of October. “More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent.”
Chang basically says that all this data is coming from state-run agencies which are cooking their books (his words, not mine).
Further, the Overcapacity argument is now making the rounds on blogs and in the media all over the world:
Another data point cited by the bears: overcapacity. For example, the Chinese already consume more cement than the rest of the world combined, at 1.4 billion tons per year. But they have dramatically ramped up their ability to produce even more in recent years, leading to an estimated spare capacity of about 340 million tons, which, according to a report prepared earlier this year by Pivot Capital Management, is more than the consumption in the U.S., India and Japan combined.
And here’s some crazy stuff about the consumer scene from a blogger:
And the bears also keep a close eye on anecdotal reports from the ground level in China, like a recent posting on a blog called The Peking Duck about shopping at Beijing’s “stunningly dysfunctional, catastrophic mall, called The Place.”
“I was shocked at what I saw,” the blogger wrote. “Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. … There is simply too much stuff, too many stores and no buyers.”
Re: Chanos and his “Short China” thesis, it should be noted that he’s been talking publicly about it since at least December 2008, and China’s stock market has almost doubled in that timeframe, as have many of the US stocks he refers to that are doing infrastructure business there.
Here’s Chanos on China in New York Magazine on December 7th 2008:
Chanos was excited that afternoon. He had just read a report that China’s electric consumption had dropped 4 percent, despite official government statistics that the Chinese economy was growing at 8 percent. He relished the implications. “I think they’re making up the numbers!” he said. As Wall Street picks up the pieces of the broken financial system, Chanos is already one step ahead. He sees China as the next domino to fall in the global meltdown. In recent months, Chanos has loaded up short positions on the infrastructure companies that have rushed to build China’s new highways, bridges, and tunnels. Now he is waiting for their share prices to tank.
I view this story as still developing. The concept of empty shopping Chinese malls has been around for awhile and China’s cold hard purchases of copper, iron ore, steel and oil are undeniable. Last week’s Al Jazeera story about the ghost city China constructed in the middle of nowhere was interesting, but given the source, I’m not even inclined to believe what I see no less what I hear.
I will be following closely regardless, and I recommend that anyone involved in the markets do the same.
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