Jim Chanos, one of the most successful and well respected investors, who specializes is short selling, has reportedly bet against China.
This from the New York Times,
``Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc.
``As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.
``“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.” He is planning a speech later this month at the University of Oxford to drive home his point." [emphasis added]
Credit excesses is a necessary but not a sufficient condition in the formation of bubbles. That's because valuation excesses have always been a manifestation of the collective actions of mass psychology filliped by excessive doses of credit.
And markets are primarily and basically psychology, which means people respond to incentives from which government policies have been a key instrument.
So yes, while we agree with Mr. Chanos that current policies in China, and the continued pursuit thereof may bring her towards a full bubble cycle, we don't agree that China has reached a manic phase of typical bubble cycle [as we have argued in China's Bubble And The Austrian Business Cycle.]
There will be more convincing and obvious signs where China would have reached its 'euphoric' or manic zone. Mr. Chanos may be betting too early and too soon which may be catastrophic (see below).
Here is the next chink in the armor for Mr. Chanos, again the same New York Times article,
``For all his record of prescience — in addition to predicting Enron’s demise, he also spotted the looming problems of Tyco International, the Boston Market restaurant chain and, more recently, home builders and some of the world’s biggest banks — his detractors say that he knows little or nothing about China or its economy and that his bearish calls should be ignored.
``“I find it interesting that people who couldn’t spell China 10 years ago are now experts on China,” said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. “China is not in a bubble.”
``Colleagues acknowledge that Mr. Chanos began studying China’s economy in earnest only last summer and sent out e-mail messages seeking expert opinion."
``But he is tagging along with the bears, who see mounting evidence that China’s stimulus package and aggressive bank lending are creating artificial demand, raising the risk of a wave of nonperforming loans. [emphasis added]
Two noteworthy developments here:
One, in contrast to Mr. Jim Chanos' former exploits where he had been one of the originating or 'lead' contrarian, here we have the famous short seller cramming with a crowd of China bears or skeptics.
In other words, instead of relying on his convictions from self-analysis, he seems to be simply borrowing the unproven idea of others.
As Warren Buffett warned, "risks comes from not knowing what you are doing".
Two, Mr. Chanos appears to confuse interpreting actions of profit driven corporations as similar with that of an economy. The latter of which is more complex with multitude of working parts driven by distinct incentives, e.g. enterprises-profits, government leadership-politics, bureaucracy-technical guidelines provided by leadership, state owned enterprises- a mixture of both etc...
In addition he appears to be bewitched by mainstream's "aggregate-ism" or the flawed notion that the world operates in simplistic dynamics-so as to fall for inane sloganisms as China Inc.
In short, Mr. Chanos appears to have departed from his field of specialization (residual specific risk), and now dabbles with issues which he seems unfamiliar with, particularly by engaging in macro bets (systematic risks).
Considering that policy based imbalances have brought upon many opportunities to engage in specific risks globally, it a curious thing for Mr. Chanos to deviate from his expertise.
And this leads us to wonder, "Could Mr. Chanos have reached what is known as the Peter Principle or "Rising to one's level of incompetence"? Or could his actions reflect on overconfidence from his strings of successes?
This from the New York Times,
``Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc.
``As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.
``“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.” He is planning a speech later this month at the University of Oxford to drive home his point." [emphasis added]
Credit excesses is a necessary but not a sufficient condition in the formation of bubbles. That's because valuation excesses have always been a manifestation of the collective actions of mass psychology filliped by excessive doses of credit.
And markets are primarily and basically psychology, which means people respond to incentives from which government policies have been a key instrument.
So yes, while we agree with Mr. Chanos that current policies in China, and the continued pursuit thereof may bring her towards a full bubble cycle, we don't agree that China has reached a manic phase of typical bubble cycle [as we have argued in China's Bubble And The Austrian Business Cycle.]
There will be more convincing and obvious signs where China would have reached its 'euphoric' or manic zone. Mr. Chanos may be betting too early and too soon which may be catastrophic (see below).
Here is the next chink in the armor for Mr. Chanos, again the same New York Times article,``For all his record of prescience — in addition to predicting Enron’s demise, he also spotted the looming problems of Tyco International, the Boston Market restaurant chain and, more recently, home builders and some of the world’s biggest banks — his detractors say that he knows little or nothing about China or its economy and that his bearish calls should be ignored.
``“I find it interesting that people who couldn’t spell China 10 years ago are now experts on China,” said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. “China is not in a bubble.”
``Colleagues acknowledge that Mr. Chanos began studying China’s economy in earnest only last summer and sent out e-mail messages seeking expert opinion."
``But he is tagging along with the bears, who see mounting evidence that China’s stimulus package and aggressive bank lending are creating artificial demand, raising the risk of a wave of nonperforming loans. [emphasis added]
Two noteworthy developments here:
One, in contrast to Mr. Jim Chanos' former exploits where he had been one of the originating or 'lead' contrarian, here we have the famous short seller cramming with a crowd of China bears or skeptics.
In other words, instead of relying on his convictions from self-analysis, he seems to be simply borrowing the unproven idea of others.
As Warren Buffett warned, "risks comes from not knowing what you are doing".
Two, Mr. Chanos appears to confuse interpreting actions of profit driven corporations as similar with that of an economy. The latter of which is more complex with multitude of working parts driven by distinct incentives, e.g. enterprises-profits, government leadership-politics, bureaucracy-technical guidelines provided by leadership, state owned enterprises- a mixture of both etc...
In addition he appears to be bewitched by mainstream's "aggregate-ism" or the flawed notion that the world operates in simplistic dynamics-so as to fall for inane sloganisms as China Inc.
In short, Mr. Chanos appears to have departed from his field of specialization (residual specific risk), and now dabbles with issues which he seems unfamiliar with, particularly by engaging in macro bets (systematic risks).
Considering that policy based imbalances have brought upon many opportunities to engage in specific risks globally, it a curious thing for Mr. Chanos to deviate from his expertise.
And this leads us to wonder, "Could Mr. Chanos have reached what is known as the Peter Principle or "Rising to one's level of incompetence"? Or could his actions reflect on overconfidence from his strings of successes?
