
Contrarian Investor Predicts Economic Crash in China  - sown
http://www.nytimes.com/2010/01/08/business/global/08chanos.html
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jfarmer
About ten years ago I read a book about the Great Chinese Famine.

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.

~~~
baguasquirrel
Maybe everyone's is. If this sounds scary, perhaps it's true.

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tokenadult
"He even suspects that Beijing is cooking its books, faking, among other
things, its eye-popping growth rates of more than 8 percent."

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.

~~~
mahmud
China might be a blackbox, but at least you can measure its inputs and
outputs. It's a largely manufacturing economy: you have imported raw
materials, and you have exports. You can get a good ballpark estimate of
Chinese economy by just studying the receipts and invoices of importers in the
U.S. (or the West in general.)

~~~
trevelyan
Until Chinese families and companies can invest their savings abroad, the only
three places they can go is into education, real estate and the stock market.
China has bubbles in all three of those sectors.

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.

~~~
Retric
Chinese economic growth rate is actually fairly slow for a developing nation.
The government has decided to slowly enter the world economy and by doing so
it has made things look great, however it's just repeating the same transition
that Japan, South Korea and others went though.

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.

[http://www.google.com/publicdata?ds=wb-
wdi&met=ny_gdp_mk...](http://www.google.com/publicdata?ds=wb-
wdi&met=ny_gdp_mktp_cd&idim=country:KOR&q=GDP+South+Korea+graph)

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jacquesm
So he goes short on China, so what. There are enough people in the prediction
business that some of them will be right some of the time. When all of them
are right all of the time it starts to get interesting, probably we'll see new
economic theories.

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.

~~~
joshu
Are you betting that it will go up, or are you just posting to a forum about
your opinion? Big difference.

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.

~~~
jacquesm
Betting that it will go up because I firmly believe that China is doing what
it can to move forward and become a real world power. If the last two decades
are any indication they seem to be doing so quite well. They are trying to
implement as many lessons they learned from picking Hong Kong apart as they
can without losing control, I'm not sure that they will manage in that goal,
and it frightens me to think of what it would be like if China ever fell
apart.

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.

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johnl
You can get a hint of what is happening by looking at the countries around
China. South Korea real estate prices are back up to where they were before
the crash, Australia has had to raise interest rates to cool down their
economy. There is even talk the Japan might be coming out of it's funk. With
that type of growth China's books have to be pretty messy, but I don't think
they are blowing smoke.

~~~
boredguy8
Why is that at all true?

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.

~~~
evgen
It is worth considering that if you are inside China and sitting on a pile of
money from foreign trade over the past few years the best place to put that
money if you think things are going to go south is probably somewhere outside
the country. Buy foreign real estate and equities while you can but make your
purchases in places that you can easily visit/check-out/escape-to...

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ajju
I have heard strong skepticism about official growth (and other) figures from
China for a long time from folks in equity trading.

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mynameishere
_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._

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'.

~~~
garply
Instead of shorting FXI, you can buy FXP, which will have a similar effect.

~~~
mynameishere
The leveraged short and long ETFs have built-in decay which makes them
unsuitable for anything but daytrading.

[http://seekingalpha.com/article/119316-double-and-triple-
etf...](http://seekingalpha.com/article/119316-double-and-triple-etfs-decay-
their-value-faster-by-design)

~~~
BearOfNH
I think it's unfair to claim "built-in decay" is unique to leveraged ETFs.
This happens with all financial instruments: stocks, funds, ETFs, futures,
options, etc. Any price that goes up X% and then down X%, or vice versa, ends
up lower than the starting point. For any instrument.

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.

~~~
byrneseyeview
No, it's completely fair. Leveraged ETFs rebalance in such a way that the
losses compound faster than the gains. If they did no rebalancing (i.e.
started out with $100M in cash and $200M in debt, and kept the $200M no matter
what the equity price did) the decay wouldn't happen.

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byrneseyeview
I don't have a source for this on hand, but I've read that Kynikos'
Associates' average annual performance is negative. Since they're net short
equities, that's quite an accomplishment (it means that if, for example, you
made leveraged investments in an index fund, and additional leveraged
investments in Kynikos, you could end up with a higher annual return with
lower risk).

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.

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maxklein
The reality in china - there is a huge underemployed class of people. But real
estate is still cheap. In Beijing, Shanghai, Shenzhen and some other
countries, housing is expensive, but the rest of china is still cheap, even
for locals. So I dont really see a bubble there.

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.

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jacoblyles
So I guess most investors are predicting growth.

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.

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llimllib
I expected to see onion.com on the byline, not nytimes.com

