The New York Times is reporting that America's top short-seller thinks there is a China bubble:
James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true.
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.
Many investors are not buying Chanos' argument, noting that he is a relative neophyte when it comes to China. Take, for example, China-bull Jim Rogers: "I find it interesting that people who couldn’t spell China 10 years ago are now experts on China. China is not in a bubble.”
Your humble blogger is in no position to speculate whether or not "Beijing is cooking its books". However, it is interesting to note that, much like the sub-prime crisis in America, an economic crisis in China would quickly reverberate beyond China's borders.
In fact, the ripple effects of a severe economic downturn in China cannot be overstated. As I noted on Thursday, China has ambitious plans to open economic zones throughout the developing world, including many in Africa. If China is confronted with the reality that its factories have been overproducing, Beijing is more than likely to pull the plug on its overseas industrial investments, as it is going to need to focus on preserving domestic growth and employment. Meanwhile, commodity prices would plummet.
Seeing that China is the largest trading partner of several emerging economies, including Brazil and South Africa, (and an important trading parter with pretty much everyone), China's woes would spread quickly everywhere.
In spite of their impressive performance after the financial crisis, emerging economies remain vulnerable, as much of their growth has been driven by a resurgent China. A Chinese economic downturn would quickly exacerbate these vulnerabilities.
Perhaps this is why the global stock of foreign exchange reserves has risen sharply over the past few months? Emerging economies may be sanguine about their future, but they seem to be cautiously preparing for the worst.