China enjoyed a year of staggering growth in its GNP and on its stock exchange board in 2009. Most economists believe 2010 will bring more of the same for the Chinese economy, for it seems as though getting money now is not much of a considerable issue for them. The Chinese government has poured $586 billion into a stimulus package aimed at spurring the growth of their economy.
Against the tide
Burgeoning new industries, ample natural resources and government support add up to a winning combination for most financial analysts. One investor, however, with a track record for predicting when big bubbles will burst, isn’t buying what the Chinese government is selling. Billionaire hedge-fund investor James S. Chanos sees a lot of holes in the narrative the Chinese government is spinning out. Chanos believes the Chinese are faking their numbers outright according to an article in the New York Times. He predicts the bust in the real estate sector in China will begin a debt and credit problem a 1000 times worse than Dubai’s late last year.
A strong track record
Chanos isn’t just any voice shouting above the crowd. He has a track record of being right when everyone else is going the other way. Chanos predicted the Enron fall, Tyco International’s demise, problems with the Boston Market restaurant chain, and the most recent downfall of home builders. Each time the experts predicted continued growth and prosperity, each time Chanos bet against them and won. Mainstream economists claim he lacks expertise regarding the Chinese economy and is not as familiar with the way it functions compared to Western economies. Chanos argues back that very few Westerners know much about the Chinese economy.
Debt is debt
Chanos bases his evaluations on excesses in credit much more than any excesses in valuation. In other words, he sees the rapid expansion of the Chinese economy as being too debt and credit dependent. Chanos believes that consumers are gaining access to credit far too easily, and this will eventually lead to a mountain of bad debt. Further, he does not believe the growth numbers that China is putting out. Communist governments have a history of putting out propaganda that is not necessarily based on realistic numbers. Much of the credit excess lies in the real estate sector according to Chanos, and this will lead to wide spread default when home buyers and investors can’t pat their notes.
Economic growth based on easy credit and hyper-valuation should set off alarm bells for anyone paying attention to the global economy in the past two years. Excesses in the real estate sector combined with abuses in the financial sector brought down the American economy along with more than 130 of its banks during that time period. The Chinese government pouring hundreds of billions into supporting growth in the housing market should give investors a feeling of dreaded familiarity. The Chinese seemed to be making the same mistakes the U.S. did, only they are putting money into a pre-bailout. When the artificial economy hits the fan, the Chinese will look very familiar to American investors.
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