China meltdown or Chanos’ claptrap

Founder and Publisher of the Switzer Report
Print This Post A A A

Me old mate Craig James of CommSec says the answer to all questions is pretty well “China!”. Our high dollar, our budget deficit, lower commodity prices, even the current lower share prices are all linked back to China.

I’d add to that the fact the USA is always important to markets and, right now, Japan and its plan to grow its money supply and the ongoing European challenges are all crucial to stock market direction. However, China is pivotal and when it recorded a disappointing economic growth number – 7.7% for the March quarter – which was down only 0.2% from the quarter before and only 0.3% off economists’ guesses, global markets sold off material stocks as commodity prices dropped.

This could end up being another market overreaction or it could be the start of a China Syndrome, with market meltdown implications. Legendary hedge fund player, Jimmy Chanos, who has been predicting bad tidings for China for years, is again, with his legend of followers, adding fuel to the fire and that explains some of the nervousness around right now.

Too much too soon

Of course, the current concerns are overdone but they could be on the money if more bad news emerges but a 0.3% miss, in the world of economic forecasting, is meaningless. Sure I’d have liked to see the growth number go up, but at least it might prove that the Chinese don’t put out dodgy figures, unless they were a lot worse and they covered it up! But let’s not go there.

Also making others concerned last week was the price of gold tanking – where are the Chinese and Indians, for that matter, who love the stuff? Is the middle class in China turning tail and running from spending? Well, it could be so, but I’m currently in Hong Kong and in the malls and the markets they’re spending like there is no tomorrow and it’s Chanel, Louis Vuitton and Yves Saint Laurent bags they’re carrying!

There are concerns about the Chinese government’s spending and its borrowing. Social investment was up 23% over the year, while there are claims that steel production is in an over-supplied state and that’s why producer prices fell significantly.

The steel industry produced 2.2 million tons of steel per day in February – a historic high – and it’s expected it will drive up annual production to 800 million tons. Against this, it’s reported that steel companies are making losses.

The bears

Roger Montgomery says China has a foreign reserves problem but there is no factual information on that, though I am looking. Roger has cited Chanos on my TV show before and I concede he has got it right a few times, but I don’t know with China. I think it’s a special case.

Chanos is obsessed with China’s problems – ghost towns, dodgy figures, an unsustainable economic model, etc etc.

On November 23, 2011, Bloomberg reported Chanos chiding Aussies for believing in the China story. But if you’d listened to him, you’d have stayed in term deposits and missed last year’s bounce in stocks.

You would’ve missed the 18% capital gains, plus dividends, which would mean about 30% plus you would’ve missed out on!

By the way, the S&P/ASX Accumulation Index is only 10% or so under its pre-GFC level, which shows how important dividends are.

Chanos argues the Chinese banking system is “built on quicksand, and that’s the one thing a lot of people don’t realise. When they talk about the foreign reserves of $3 trillion, what everybody forgets is there are liabilities against that.”

That was November 2011 and he was predicting economic Armageddon for China and its property prices. They have survived, but can it last? That is the crucial question for us.

Misery loves company

In February 2012, Chanos was complaining about dodgy Chinese figures on inflation and he was suggesting a recession was a possibility.

He has always said that China has bought US and European bonds to keep their customers – the USA and Europe – alive. But is China running out of reserves?

And this is why I am backing China over Chanos. On March 4, Bloomberg led with “China’s Reserves Ample to Buy World’s Gold Reserves Twice!”. It went further to point out: “China’s foreign reserves surpassed the value of all official bullion holdings in January 2004 and rose to $3.3 trillion at the end of 2012, data compiled by Bloomberg show.”

Furthermore, China’s reserve assets were 30.2% of the world total at the end of last year, compared with 14% at the start of 2004, Bloomberg revealed.

I think Jimmy is a smart guy but he is talking his own book and while China, like all economies, will have some challenges, I’m running with the bulls on this economy, which is the biggest contributor to world growth. Go China. No Chanos.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also in the Switzer Super Report

Also from this edition