The mainstream financial press has recently started picking up on the idea of weather or not “China” is a bubble. Longtime China bull Jim Rogers is quoted as saying: “I find it interesting that people who couldn’t spell China 10 years ago are now experts on China… China is not in a bubble.”
Rogers’ partner George Soros got famous shorting sterling. Meanwhile, Jim Chanos got famous shorting Enron. Chanos noticed that Enron had a very low return on Capital Investment (only 6-7%/year) and is seeing the same low return on invested capital here in China.
The first day I ever came to Shanghai, it was for a lunch invitation with Rogers. I fell in love with the place, and though it took a few months to get here, I plan to stay in Shanghai. Bubble or not. That first day in Shanghai, standing with Rogers on top of the Ritz Carlton, he explained to me the madness of the Shanghai real-estate bubble, and moreover, the world wide real-estate bubble. So there you go: “Rogers, China real-estate Bubble: Yes”.
Listen, Rogers is saying that “There is no commodities bubble”. Rogers has a huge amount invested in this, and if central banks keep printing money, they keep proving Rogers right. When China’s real-estate bubble pops, some commodities will take a short term hit, but the macro trend is that the USD is being devalued.
Chanos isn’t saying that he doesn’t think that China has a bright future, he is said the GDP numbers are “massively inflated by under-depreciating a very, very, very shaky capital asset base.” Chanos’ critics say that China’s different because there’s no leverage here, but that’s not true. The market is leverage by multiple layers of ownership each using existing property as collateral. Not unlike the structured leverage in Dubai, but completely different from the leveraging the the US property market.
Most interesting is that many in the US are vehemently opposed to government involvement in the economy, yet those same people are bullish on the China market because the Chinese Technocrats can “fine tune” the economy at their will. These are the same all powerful technocrats that drop dead regularly bingeing with the hostesses at KTV.
Here’s the relevant China situation, as it stands today, summed up quickly:
1. Everybody in China was dirt poor from 1949-1977 because the gov’t prevented private enterprise (basically the same as North Korea today)
2. In 1977, Deng Xiaoping created the first Special Economic Zone in Shenzhen, beginning the growth of China.
3. In the late 90s, Clinton arranged for China to enter the WTO, speeding up foreign direct investment
4. More investment more, higher efficiency factories and foreign exchange reserves soared
5. The gov’t invested (25%?) these foreign exchange reserves into infrastructure, creating hopes of a modern, industrialized, first world China at some point in the future.
6. The owners of the factories, the beneficiaries of the infrastructure projects earned private profits, and had to invest these profits – due to lack of investment options, most chose to invest in luxury real-estate, pushing up prices to current levels.
7. In ’07, the Global Economic Crisis came and China still had enough foreign reserves to weather the crisis, not only offsetting the drop in exports, but preserving the lucky “8%” GDP “growth”.
8. Throughout ’08/’09, Due to high real-estate prices and weakened global trade and investment options, even more money has been poured into Chinese Real-Estate
Things to remember. The Technocrat “Central Planners” have never had a good track record. We’re all aware of the disasters of Communist Central Planning of Russia, Cuba and the Closed China. In the 80s though, American’s talked about the magic of the METI (Ministry of Economy, Trade and Industry) explaining how America couldn’t compete with Japan’s centrally planned capitalism. That infatuation ended around when American’s bought Rockefeller Center back from Japanese investors for half the price.
Personally, I’m very long on the Chinese entrepreneurs and the Chinese people. In the next 50 years, I hope that most of them are able to join us Americans, and our allies in Japan and Europe in first world living standards – they’ve already done so in Hong Kong and Taiwan and it seems to be a great thing for all of us. Meanwhile, I’m very bearish on bureaucrats everywhere, and nowhere more so than where the bureaucrats are living in a giant bubble – and feeding the bubble for their own benefit.