WHAT CHINA BUBBLE?

Written on the 5 March 2010

WHAT CHINA BUBBLE?

SPECULATION about economic recovery has put heavy weight on Chinese economic success, but is it a story that’s too good to be true?

Billionaire hedge fund manager Jim Chanos, who predicted the collapse of Enron, is forecasting the great fall of China.

It’s a prospect that may raise a few heart rates, but at brisbanebusinessnews.com.au we speak to macroeconomic financial expert Mathew Jeremy, who sets the record straight.

There’s a big difference between a company and a nation.

This is the message of Mathew Jeremy, managing director at Caravel Consulting Services, an independent advisory for institutional investors based in Brisbane.

“People have been predicting a China bust for ten years now and it hasn’t happened – don’t bet against the Chinese government. That’s one of the big differences between analysing Enron and the Chinese economy,” says the former Asia researcher with National Mutual.

“Enron was a self-contained unit, and when they were to go belly up who was to be their saviour? No one. But if something goes wrong with the Chinese economy, who’s the backstop? The government, and why would they go in and save it? It’s because they have to.”

He describes Chanos’ argument in two parts – the first is that China is ‘cooking the books’ with its economic growth numbers and the second is that there’s a bubble in the housing and equity market.

The first argument comes back to the uncertainty of official data, but Jeremy confronts these concerns by cross-checking with independent studies from the Center for European Economic Research (ZEW) in Germany and the Organisation for Economic Co-operation and Development (OECD) – both confirm the official Chinese forecasts.

“I’m not too fussed about the notion of they’re cooking the books on the statistics – I wouldn’t be taking big portfolio decisions on that story,” he says.

“Secondly I’m reasonably confident that they can continue to grow the economy at the pace they have been and manage it without letting it get out of control. So on that front I think it’s a positive story for people like us, the demand for resources will continue.”

Jeremy also points out that anyone short selling on China is really betting on another global downturn.

“Whenever someone’s really taking a story and they’re all up to the gills on it, that’s when it gets risky. If Jim Chanos were to say the market’s going to go down in general and I’m going to start shorting on that, that would make more sense to me than picking on China,” he says.

“I can see why Chanos is selling the story that he is, but I’d have to say that analysing a country like China is a different kettle of fish than due diligence on a company like Enron, which he got spectacularly right.”

What adds to the difficulty in this type of short-selling is that the range of financial instruments in China is limited to the Hong Kong Stock Exchange, because you can’t play the currency or the property market.

“So these guys play related things. If you look at something like Chinese economic growth and commodity prices, then you have a pretty clear relationship – things like the Australian dollar, commodity prices, resource stocks, these are things that are all potential beneficiaries of the China growth story.”

But while Jeremy believes betting against China is entering dangerous territory, not everything is in black and white, with a need for all investors to exercise caution.

“If at some point global investors were to be over-exposed to emerging markets then a negative shock to global growth could make those exposures look riskier than they thought."


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