Chanos and Rogers: Right and Wrong on China

by: John Henderson

When such noted investors as Jim Chanos and Jimmy Rogers are so diametrically opposed to the same investment thesis, one cannot help but be drawn into trying to figure out who is right and who is wrong. In the case of these two investment legends and their views on China, I have been musing for the past few days on the subject. As of now, I have come to the following conclusion: both Jims are both right and wrong with their views on China. In both cases, timing seems to be the biggest consideration investors should think about in determining who is right and who is wrong. Let me explain.

If history is any guide, it seems as though the excessive and reckless bank lending seen during 2009 is sure to catch up with China. Ultimately, the big question is when and to what degree. With China’s recent slight increase to the overnight lending rate that banks charge each other, we can expect more of these increases in the coming months. In and of itself, these increases will not put an end to the speculative behavior still being seen in the real estate area, but they do show that China’s government is concerned about what is taking place in their real estate market. Is it enough though?

As most investors know, bubbles can and will last a lot longer than expected. As a means of determining whether or not Jim Chanos is right about China’s real estate market, I thought it would be helpful to overlay a chart of 3 China Real Estate ADR’s together. As can be seen in the chart below, 2 of the 3, CRIC and XIN, are already in full-blown downtrends, while EJ seems close to topping out:

1 Year Chart EJ, CRIC, & XIN

1 Year Chart of EJ, CRIC, & XINClick to enlarge

Looked at from this perspective, it seems as though Jim Chanos may be right on his real estate thesis. After all, the only thing that really pays is price and, as of now, the market is casting its vote with Chanos. So, on this front, Jimmy Rogers is wrong in not acknowledging the problems in China’s real estate market.

Moving away from China’s real estate sector, Jim Chanos seems to be wrong in ignoring the various long-term secular plays in China. Areas such as its non-real estate infrastructure build-out, its 3-G build, its surging auto sector, and its booming solar space are just a few of the areas that continue to offer investors good opportunities to make money in the here and now. All one has to do to see the merits in remaining long various sectors in China is look at charts in such China plays as AMSC, CAAS, CYD, JST, OTC:RINO, TSL, & YGE. While these areas may be subject to a big pull-back whenever China’s real estate problems seep into the rest of the economy, for now, these stocks all look like they are going higher.

So, to sum it all up, Jimmy Rogers gets the nod for staying involved in the long-term secular growth opportunities in China in the short-term. On this front he is right and Jim Chanos is wrong. Meanwhile, Jim Chanos gets the nod for his real-estate views. While it may take some time for the entire real estate market to really crack, for now, the market seems to be validating his views on the real estate bubble. So, on this front, Jim Chanos is right and Jimmy Rogers is wrong.

Ultimately, this is just my own opinion and I could be proved wrong for even weighing in on this debate. Only time will tell. After all, I may be somewhat skewed in being slightly long AMSC and also YGE via a small option position in both.

One final note everyone should think about. China’s stock market may be in the midst of putting in a long-term top. While the rest of the world’s equity markets seem to race to new 52-week highs each day, China’s market lags very badly. A look at the 1 Year chart below shows how China’s Class A index cannot make a fresh 52 week-high for six months running:

1 Year Chart Shaghai Class A
Click to enlarge

Any breach of 3200 to the downside would be very troublesome for China’s market, while a move above 3500 would have very bullish implications. Sure makes for an interesting side note for investors to consider as they try to figure out who is right and wrong in the Chanos and Rogers debate.

Disclosure: I am long AMSC and YGE via call position in each.