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China's Future Economic Meltdown

ಠ_ರೃಠ_ರೃ __BANNED USERS regular
edited January 2010 in Debate and/or Discourse
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.

"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." He is planning a speech later this month at the University of Oxford to drive home his point. 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." Mr. Chanos declined to be interviewed, citing his continuing research on China. But he has already been spreading the view that the China miracle is blinding investors to the risk that the country is producing far too much.

"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. In recent months, a growing number of analysts, and some Chinese officials, have also warned that asset bubbles might emerge in China. 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. 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.

"It's going to be a bust," said Gordon G. Chang, whose book, "The Coming Collapse of China" (Random House), warned in 2001 of such a crash. 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.

"His record is impressive," said Byron R. Wien, vice chairman of Blackstone Advisory Services. "He's no fly-by-night charlatan. And I'm bullish on China."

Mr. Chanos grew up in Milwaukee, one of three sons born to the owners of a chain of dry cleaners. At Yale, he was a pre-med student before switching to economics because of what he described as a passionate interest in the way markets operate. His guiding philosophy was discovered in a book called "The Contrarian Investor," according to an account of his life in "The Smartest Guys in the Room," a book that chronicled Enron's rise and downfall. After college, he went to Wall Street, where he worked at a series of brokerage houses before starting his own firm in 1985, out of what he later said was frustration with the way Wall Street brokers promoted stocks.

At Kynikos Associates, he created a firm focused on betting on falling stock prices. His theories are summed up in testimony he gave to the House Committee on Energy and Commerce in 2002, after the Enron debacle. His firm, he said, looks for companies that appear to have overstated earnings, like Enron; were victims of a flawed business plan, like many Internet firms; or have been engaged in "outright fraud." That short-sellers are held in low regard by some on Wall Street, as well as Main Street, has long troubled him. Short-sellers were blamed for intensifying market sell-offs in the fall 2008, before the practice was temporarily banned. Regulators are now trying to decide whether to restrict the practice. Mr. Chanos often responds to critics of short-selling by pointing to the critical role they played in identifying problems at Enron, Boston Market and other "financial disasters" over the years." They are often the ones wearing the white hats when it comes to looking for and identifying the bad guys," he has said.


What do you all think is on the horizon for China in this new decade? Is it becoming a bad time to bet on China? Is China really the next Dubai? If this shit goes down how could America profit from it and what does it mean for the rest of the world? Would China going down fuck us all over? Or would it merely spur the creation of newer economic powerhouses all over the world? Where else could we get cheap as hell labor like this?

Personally I'm not a fan of China and neither are many of you, but they are a necessary evil. However, there is a lot of fucking money at stake here, and the elephant in the room cannot be ignored for much longer.

Thoughts

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    Irond WillIrond Will WARNING: NO HURTFUL COMMENTS, PLEASE!!!!! Cambridge. MAModerator mod
    edited January 2010
    It sounds like the guy's problem with China is that global demand will not keep pace with their production and they will experience a crash. But that still seems like China would be in a relatively good spot and might even increase their level of domestic consumption.

    It does not seem at all analogous to Dubai. Or Enron.

    Also, China's massively undervalued currency is ultimately a protection against a real financial cataclysm, and its massive holdings of international currencies is a huge hedge. It is hard to envision a scenario in which China goes down without the rest of the world going down first.

    Irond Will on
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    Pi-r8Pi-r8 Registered User regular
    edited January 2010
    I don't think that they'll have a real meltdown, but I do think China's economic growth is going to slow down soon. Most of their growth is based on manufacturing- they have the infrastructure to do heavy manufacturing that a lot of 3rd world nations don't have, but they can also get away with paying very low wages to their factory workers, so the goods cost less to make than they would in a 1st world nation(currency manipulation also helps with this) . But there's only so much demand for cheap manufactured goods, and they can't use that model to raise wages for their employees. At some point, China will need new methods of growth in order to keep raising their standard of living.

    Pi-r8 on
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    zeenyzeeny Registered User regular
    edited January 2010
    What do you all think is on the horizon for China in this new decade?

    Closes the gap to the US GDP even more. Closes the gap on the US oil consumption. Annexes Taiwan.
    Is it becoming a bad time to bet on China?

    What do you mean? Investing? I personally wouldn't invest there without regard of economic situation.
    Is China really the next Dubai?

    Not a fucking chance.
    If this shit goes down how could America profit from it and what does it mean for the rest of the world?

    It won't profit, it would suffer. Badly.

    zeeny on
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    monikermoniker Registered User regular
    edited January 2010
    Pi-r8 wrote: »
    I don't think that they'll have a real meltdown, but I do think China's economic growth is going to slow down soon. Most of their growth is based on manufacturing- they have the infrastructure to do heavy manufacturing that a lot of 3rd world nations don't have, but they can also get away with paying very low wages to their factory workers, so the goods cost less to make than they would in a 1st world nation(currency manipulation also helps with this) . But there's only so much demand for cheap manufactured goods, and they can't use that model to raise wages for their employees. At some point, China will need new methods of growth in order to keep raising their standard of living.

    Actually their standard of living can rise a good bit since China hasn't been the cheapest source of labour for years/decades, but it is still the primary source for manufacturing because they have logistical infrastructure down pat which simply doesn't exist in Vietnam or wherever. This permits increased wages while retaining lower barriers to entry and lower costs.

    moniker on
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    WienkeWienke Registered User regular
    edited January 2010
    While I won't go betting against the growth of China just yet, there is a very big reason why investors need to diversify their portfolios. Fundamentally, as long as the US is healthy, China is healthy. Even with this recession, the US is very very healthy.

    If a China bubble pops (if it exists), I don't think that it'll be a big burst because of the American appetite for Chinese goods

    Wienke on
    PSN: TheWienke
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    Pi-r8Pi-r8 Registered User regular
    edited January 2010
    moniker wrote: »
    Pi-r8 wrote: »
    I don't think that they'll have a real meltdown, but I do think China's economic growth is going to slow down soon. Most of their growth is based on manufacturing- they have the infrastructure to do heavy manufacturing that a lot of 3rd world nations don't have, but they can also get away with paying very low wages to their factory workers, so the goods cost less to make than they would in a 1st world nation(currency manipulation also helps with this) . But there's only so much demand for cheap manufactured goods, and they can't use that model to raise wages for their employees. At some point, China will need new methods of growth in order to keep raising their standard of living.

    Actually their standard of living can rise a good bit since China hasn't been the cheapest source of labour for years/decades, but it is still the primary source for manufacturing because they have logistical infrastructure down pat which simply doesn't exist in Vietnam or wherever. This permits increased wages while retaining lower barriers to entry and lower costs.

    agreed, but there's still just a finite demand for that stuff, and they'll never be able to pay a first-world salary to factory workers with that model.

    Pi-r8 on
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    zeenyzeeny Registered User regular
    edited January 2010
    moniker wrote: »
    Pi-r8 wrote: »
    I don't think that they'll have a real meltdown, but I do think China's economic growth is going to slow down soon. Most of their growth is based on manufacturing- they have the infrastructure to do heavy manufacturing that a lot of 3rd world nations don't have, but they can also get away with paying very low wages to their factory workers, so the goods cost less to make than they would in a 1st world nation(currency manipulation also helps with this) . But there's only so much demand for cheap manufactured goods, and they can't use that model to raise wages for their employees. At some point, China will need new methods of growth in order to keep raising their standard of living.

    Actually their standard of living can rise a good bit since China hasn't been the cheapest source of labour for years/decades, but it is still the primary source for manufacturing because they have logistical infrastructure down pat which simply doesn't exist in Vietnam or wherever. This permits increased wages while retaining lower barriers to entry and lower costs.

    I recently watched a documentary on the Chinese Western Development projects, I thought they are really impressive(well, as far as infrastructure goes).

    zeeny on
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    monikermoniker Registered User regular
    edited January 2010
    zeeny wrote: »
    moniker wrote: »
    Pi-r8 wrote: »
    I don't think that they'll have a real meltdown, but I do think China's economic growth is going to slow down soon. Most of their growth is based on manufacturing- they have the infrastructure to do heavy manufacturing that a lot of 3rd world nations don't have, but they can also get away with paying very low wages to their factory workers, so the goods cost less to make than they would in a 1st world nation(currency manipulation also helps with this) . But there's only so much demand for cheap manufactured goods, and they can't use that model to raise wages for their employees. At some point, China will need new methods of growth in order to keep raising their standard of living.

    Actually their standard of living can rise a good bit since China hasn't been the cheapest source of labour for years/decades, but it is still the primary source for manufacturing because they have logistical infrastructure down pat which simply doesn't exist in Vietnam or wherever. This permits increased wages while retaining lower barriers to entry and lower costs.

    I recently watched a documentary on the Chinese Western Development projects, I thought they are really impressive(well, as far as infrastructure goes).

    As far as infrastructure goes they're momentous. Which is pretty easy when you don't have to do environmental impact surveys, alternatives analysis, get local input, concern yourself with historic preservation, and are allowed to spend a lot more in order to far exceed projected capacity. They're like Robert Moses on crack.

    moniker on
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    Pi-r8Pi-r8 Registered User regular
    edited January 2010
    moniker wrote: »
    zeeny wrote: »
    moniker wrote: »
    Pi-r8 wrote: »
    I don't think that they'll have a real meltdown, but I do think China's economic growth is going to slow down soon. Most of their growth is based on manufacturing- they have the infrastructure to do heavy manufacturing that a lot of 3rd world nations don't have, but they can also get away with paying very low wages to their factory workers, so the goods cost less to make than they would in a 1st world nation(currency manipulation also helps with this) . But there's only so much demand for cheap manufactured goods, and they can't use that model to raise wages for their employees. At some point, China will need new methods of growth in order to keep raising their standard of living.

    Actually their standard of living can rise a good bit since China hasn't been the cheapest source of labour for years/decades, but it is still the primary source for manufacturing because they have logistical infrastructure down pat which simply doesn't exist in Vietnam or wherever. This permits increased wages while retaining lower barriers to entry and lower costs.

    I recently watched a documentary on the Chinese Western Development projects, I thought they are really impressive(well, as far as infrastructure goes).

    As far as infrastructure goes they're momentous. Which is pretty easy when you don't have to do environmental impact surveys, alternatives analysis, get local input, concern yourself with historic preservation, and are allowed to spend a lot more in order to far exceed projected capacity. They're like Robert Moses on crack.
    that's a good point. If anything were going to trigger an economic meltdown like what the OP describes, it would be some sort of massive environmental damage that forced the government to start spending massive amounts just to keep people breathing.

    Pi-r8 on
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    CauldCauld Registered User regular
    edited January 2010
    I don't see how this guy can compare the credit situation in China with the US. I certainly don't get how he can call it excissive or compare it to Dubai. He is an expert and has obviousy studied it more than I have. But I know China has much stricter credit rules in the housing market than we have in the US.

    For example, if you're buying a 2nd home or more you're required to put 50% down. Most people put down huge percentages of the price of their home. I will say that housing prices compared to most people's wages are very expensive. Also parents usually help young couples buy their homes once they're married. I believe its tradition for the grooms parents to provide the home, or help or whatever. Obviously that's much harder to do when prices go up this quickly, but they're still trying.

    On the other hand increadibly large amounts of people are moving from the countryside to the city. The government is creating massive amounts of wealth and in many cases giving it to its people. In general the government tears down old buildings/homes and builds bigger new ones in their place. If you owned an apartment in one of these old buildilngs you get a new one in the newer buildings.

    Cauld on
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    FencingsaxFencingsax It is difficult to get a man to understand, when his salary depends upon his not understanding GNU Terry PratchettRegistered User regular
    edited January 2010
    Of course, now the Chinese are obsessed with becoming energy self-sufficient as well, which means renewables.

    Fencingsax on
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    ronyaronya Arrrrrf. the ivory tower's basementRegistered User regular
    edited January 2010
    Remember that South Korea grew at ~9% for multiple decades until 1997 hit. The PRC is also moving at 9%.

    China is still very poor, on average - the average Algerian, Bosnian/Serbian, Angolan, or Egyptian all earn more than it. The average Mexican earns more than twice as much.

    If anything, China's future problems stem from political difficulties in managing growth on such a massive scale. The problems of low wages and cheap consumer goods is the same problem, more or less - your own people can't afford your own products they make. Exports greases the changes in improving both, but it's certainly not necessary, so Western collapses in demand will just slow growth, not eliminate it.

    ronya on
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    enc0reenc0re Registered User regular
    edited January 2010
    Fencingsax wrote: »
    Of course, now the Chinese are obsessed with becoming energy self-sufficient as well, which means renewables.

    Unfortunately, it means coal.

    enc0re on
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    monikermoniker Registered User regular
    edited January 2010
    enc0re wrote: »
    Fencingsax wrote: »
    Of course, now the Chinese are obsessed with becoming energy self-sufficient as well, which means renewables.

    Unfortunately, it means coal.

    Actually it means both.

    moniker on
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