Tuesday, November 10, 2009
This story just in from Politico (hat tip SL) in which Chinese pig farmers storing rolls and rolls of copper wire (that have helped to keep commodity prices lofty, widely viewed as an indication of a growing economy) now have company in the form of the Chinese government that is suspected to be storing giant parking lots full of brand new cars (that show up as "sold" in their economic statistics, widely viewed as an indication of a growing economy).
The conventional wisdom in Washington and in most of the rest of the world is that the roaring Chinese economy is going to pull the global economy out of recession and back into growth. It’s China’s turn, the theory goes, as American consumers — who propelled the last global boom with their borrowing and spending ways — have begun to tighten their belts and increase savings rates.Yes, that's the rosy scenario. The "less than rosy" view of things arises from clear signs of overcapacity and a Chinese consumer that appears to be a reluctant spender in ways that do not show up in government statistics.
“Purchases of U.S. consumers cannot be as dominant a driver of growth as they have been in the past,” Treasury Secretary Timothy Geithner said during a trip to Beijing this spring. “In China, ... growth that is sustainable will require a very substantial shift from external to domestic demand, from an investment and export-intensive growth to growth led by consumption.”
That’s one vision of the future.
The conditions on the ground may be quite different than the conditions reflected in the official economic data and at least one bear is ready to move in.
The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos.There's a bit more to this and it's well worth the look, including a frightening comparison of the U.S. subprime collapse to a coming "overcapacity" collapse in China.
Chanos, a billionaire, is the founder of the investment firm Kynikos Associates and a famous short seller — an investor who scrutinizes companies looking for hidden flaws and then bets against those firms in the market.
His most famous call came in 2001, when Chanos was one of the first to figure out that the accounting numbers presented to the public by Enron were pure fiction. Chanos began contacting Wall Street investment houses that were touting Enron’s stock. “We were struck by how many of them conceded that there was no way to analyze Enron but that investing in Enron was, instead, a ‘trust me’ story,” Chanos told a congressional committee in 2002.
Now, Chanos says he has found another “trust me” story: China. And he is moving to short the entire nation’s economy. Washington policymakers would do well to understand his argument, because if he’s right, the consequences will be felt here.
Chanos and the other bears point to several key pieces of evidence that China is heading for a crash.
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 argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.