Now that I have done my best to alienate blog readers, it is time to transition back to what the newsletter and blog are actually for; macro-economics.
Between yesterday and today, I have received emails from two different subscribers (one a former exec of a well-known auditing firm and current bank CEO, and the other an exec at a financial services firm) centered around the evidently controversial Bloomberg (good on you Bloomy!) article about hedge fund manager Jim Chanos looking into the books of China, Inc. (reproduced below).
The conclusions of the two mailers are wildly opposite, but time frames must be considered as well. I have my own intimate experience with China, which I am going to share a bit of as well. Personally, in the short term it is all about the technicals and market leadership. Longer term may be a different story. In other words, there may well be bearish and bullish in the story, subject to time frames.
Commentary by William Pesek
Jan. 12 (Bloomberg) -- It’s good to be skeptical 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 percent 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 Corp., 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 Corp.’s expected bankruptcy
reminds us of the blind bullishness on a nation’s prospects.
Chinese policy makers are a bright bunch. Anyone who steers
around the chaos of 2009 and achieves growth of close to 10
percent deserves a standing ovation. For all the collective
wisdom in Beijing, though, why does China make life so difficult
for itself by adding to its $2.3 trillion of currency reserves?
And why do it so, well, wastefully?
$10 Equals $20
Let’s say the Economist magazine’s Big Mac Index is right
and the yuan is almost 50 percent undervalued. That means when
China buys $100 billion of U.S. 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 percent, 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 Ltd. 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 Jan. 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 U.S. becoming a colony of Japan. Purchases of
Rockefeller Center, Universal Studios and Pebble Beach golf
course had commentators buzzing about a commercial Pearl Harbor.
It was not to be, of course. Crashes in Japan’s stock and
real-estate markets humiliated the conventional wisdom. A bad-
loan crisis of historic proportions ensued and, in many ways, it
has never ended.
Even today, Japan carries considerable baggage. Japan bulls
conveniently forget that modest growth from 2002 to 2007 was
only made possible by zero interest rates and a public debt now
approaching 200 percent of gross domestic product. Economic
steroids are the drug, and Japan has yet to kick the habit.
JAL’s plight says it all. Rather than let capitalism
dictate its fortunes, politicians bailed out the carrier three
times in the past nine years. It had no incentive to change. Now
the debt-laden company is preparing for what may be Japan’s
sixth-largest bankruptcy. And that’s where JAL belongs.
Cautionary Tale
Japan is a cautionary tale. It should concern officials in
Beijing that economists such as Michael Pettis, of Peking
University, likewise see China’s 2009 performance as “growth on
steroids.” The question is whether massive stimulus is creating
unbalanced growth, fueling bubbles and paving the way for a
Japan-like bad-debt crisis.
How bad could things get? “Dubai times 1,000” is how
Chanos described the risk in a CNBC interview in November. While
that may be going too far, the idea of the No. 3 economy
imploding is too horrible to consider. In 2009, China edged out
Germany to become the world’s biggest exporter.
Investors are focused on overheating. China’s central bank
last week began to roll back its monetary stimulus. By raising
the cost of three-month bills, policy makers aim to contain
asset-price inflation after a record surge in credit.
The real problem is the quality of growth. The trillions of
yuan lavished on the economy last year won’t boost demand for
exports. Nor will it soon morph the nation’s rabid savers into
enthusiastic consumers. If today’s public borrowing doesn’t
create a domestic-demand-driven economy, then it’s risky.
China’s overinvestment in 2009 may have delayed this day of
reckoning, not averted it. Officials in Beijing are on notice
that savvy short-sellers are delving into their books.
(William Pesek is a Bloomberg News columnist. The opinions
expressed are his own.)
