COMMENTARY: Don’t short China

 
TAIPEI, Taiwan — Reading The Herald Tribune over breakfast in Hong Kong
harbour recently, my eye went to the front-page story about how James Chanos —
reportedly one of America’s most successful short-sellers, the man who bet that
Enron was a fraud and made a fortune when that proved true and its stock
collapsed — is now warning that China is “Dubai times 1,000 — or
worse” and looking for ways to short that country’s economy before its
bubbles burst.

          China’s markets may be full of bubbles ripe
for a short-seller, and if Chanos can find a way to make money shorting them,
God bless him. But after visiting Hong Kong and Taiwan recently and talking to
many people who work and invest their own money in China, I’d offer Chanos two
notes of caution.

          First, a simple rule of investing that has
always served me well: Never short a country with $2 trillion in foreign currency
reserves.

          Second, it is easy to look at China today and
see its enormous problems and things that it is not getting right. For
instance, low interest rates, easy credit, an undervalued currency and hot
money flowing in from abroad have led to what the Chinese government recently
called “excessively rising house prices” in major cities, or what
some might call a speculative bubble ripe for the shorting. But China’s central
bank has started edging up interest rates and raising the proportion of
deposits that banks must set aside as reserves — precisely to head off
inflation and take some air out of any asset bubbles.

          And that’s the point. I am reluctant to sell
China short, not because I think it has no problems or corruption or bubbles,
but because I think it has all those problems — and some will blow up along
the way (the most dangerous being pollution). But it also has a political class
focused on addressing its real problems, as well as a mountain of savings with
which to do so (unlike the United States).

        All
the long-term investments that China has made over the last two decades starting
with its massive investment in infrastructure. Ten years ago, China had a lot
bridges and roads to nowhere. Well, many of them are now connected. It is also
on a crash program of building subways in major cities and high-speed trains to
interconnect them. China also now has 400 million Internet users, and 200
million of them have broadband. Check into a motel in any major city and you’ll
have broadband access. America has about 80 million broadband users.

          Now take all this infrastructure and mix it
together with 27 million students in technical colleges and universities — the
most in the world. With just the normal distribution of brains, that’s going to
bring a lot of brainpower to the market, or, as Bill Gates once said to me:
“In China, when you’re one in a million, there are 1,300 other people just
like you.”

        Finally,
as Liu Chao-shiuan, Taiwan’s former prime minister, pointed out to me: When
Taiwan moved up the value chain from low-end, labour-intensive manufacturing to
higher, value-added work, its factories moved to China or Vietnam. It lost
them. In China, low-end manufacturing moves from coastal China to the less
developed Western part of the country.

Shorting China today? Well, good
luck with that, Mr. Chanos. Let us know how it works out for you.

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