You’ve really got to hand it to them. Not content with doing their damndest to bring down some of the biggest banks in the Western world, the hedge funds have a new target – China.
Hedge fund manager Jim Chanos, the billionaire founder of Kynikos Associates, is most famous as the investor who shorted Enron’s stock before it went under. Back in 2001, clever old Chanos worked out that Enron’s public accounts were, to put it politely, a pile of the steaming stuff.
When Chanos put this to the expensively suited bloodsuckers on Wall Street, no one believed him. "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 believes he has found an even bigger "trust me" bubble that needs pricking. For the past year or so, the boys at Kynikos have been masterminding the biggest investment coup of all – how to short the government of China. Apparently they are especially excited by a recent report by Pivot Capital (another bunch of fund wonks) on how China’s investment boom is unsustainable. The report chimes with the views of other China bears like Gordon Chang, who famously declared that the country would "collapse" by 2011.
To be fair, it’s a clever piece of work by some researchers who know their economic theory. The problem is they clearly don’t understand China. Take the following snippet as an example.
"China is already at a very advanced stage of industrialization even when measured on a per capita basis, so room for further capacity expansion is limited. Urbanization is a driver that is vastly overstated, as China is much more urbanized than is reflected in statistics, so there is no ‘explosive’ pent-up demand for residential construction and all that it entails."
Try telling that to the millions of farmers moving into the China’s cities every year. Pivot’s analysts don’t believe Beijing’s estimate that the urbanization rate is currently only around 45% – but all the serious scholars in the field do.
Here’s another nugget of investment gold. "It is widely believed that China’s housing conditions are still very inadequate compared to the developed countries. While this might be the case for certain layers of society there is certainly no physical shortage of residential real estate."
Did these guys leave their hotels in Pudong?
Admittedly, China’s investment binge is not great economics. Much of the investment-driven growth is wasteful, and the technocrats in Beijing are far better at "solving" problems by building new roads than making tougher structural changes.
But the China bears give far too much credence to reports dreamt up by analysts with little experience of what the country is really like.
They misread the Chinese economy because they view the relevant facts and figures from the paradigm of Western economies – not from the reality in China itself. One of the problems is that the numbers are so mind-boggling. The scale of China’s urbanization process is so huge that plenty more investment is needed, even if the numbers look "unsustainable" on Wall Street.
Chanos can try to short China all he likes. He’ll end up losing a shed load of money. Trust me.