Streetwise Professor

February 14, 2010

Not So Tiny Bubbles?

Filed under: Economics,Financial crisis — The Professor @ 8:23 pm

I’ve written some about the sustainability of Chinese economic growth, expressing the opinion that it is a “Michael Jackson economy” kept going with artificial stimulants that are resulting in massive distortions in the allocation of capital.  These concerns are becoming more widespread.  The most notable skeptic is noted short seller (and sometime SWP lurker by proxy) Jim Chanos.  Here’s a video of Chanos laying out his views on why China is a bubble.

Bloomberg has a long article today that quotes Chanos’s views and many more as well:

nvestor concerns have spread beyond real estate. Among 15 major Asian markets, the benchmark Shanghai Composite Index is valued third-highest relative to estimates for this year’s earnings, after Japan and India, even after falling 8 percent this year.

A glut of factories in China is “wreaking far-reaching damage on the global economy,” stoking trade tensions and raising the risk of bad loans, the European Union Chamber of Commerce in China said in November.

More than 60 percent of investors surveyed by Bloomberg on Jan. 19 said they viewed China as a bubble, and three in 10 said it posed the greatest downside risk. The quarterly poll interviewed a random sample of 873 Bloomberg subscribers and had a margin of error of 3.3 percentage points.

Digesting the debt from a popped property bubble may slash bank lending and drag growth lower for years in an economy that Nomura Holdings Inc., Japan’s biggest brokerage, says will provide more than a third of world growth in 2010.

Japanese Comparison

The risks are so great that a decade of little or no growth, as Japan experienced in the 1990s, can’t be dismissed, said Patrick Chovanec, an associate professor in the School of Economics and Management at Beijing’s Tsinghua University, ranked China’s top university by the Times newspaper in London.

The alternative view is that China need not worry about the gridlock of democratic politics, and its central government will be able to play Goldilocks, and make everything just right by intervening at just the right thime, and failing that, will fall back on its dollar hoard.  This, to me, represents a completely unrealistic view of the wisdom of central planners in general, and Chinese mandarins in particular.  I do not see how this can end well.

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  1. Interesting. Other signs of bubble: Tom Friedman says China is the way of the future.

    But is there an efficient way to short China? Even if it’s a bubble, it could still last quite a while longer.

    Comment by Hal — February 15, 2010 @ 11:03 am

  2. I disagree. I think China is going to be the last superpower of the industrial age.

    Comment by Sublime Oblivion — February 16, 2010 @ 2:53 am

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