In the interview he only talked about two segments of China; real estate and reverse mergers (this Longtop is the latest one of these to blow up I guess). We know there are a lot of questions about how many apartments have been built, how many are empty and how many will remain empty.
I don't know if bubble is the right word and frankly I don't care. It is easy to envision that the apartment capacity is far ahead of the rural to urban migration, exceeds the need of the people who own two or three of them, that there could be a problem at some point with over leverage (not on the properties as the down payments are huge, but in terms of carrying two or three mortgages), that the banks will mismanage their loan portfolios or that the developers will over leverage themselves. This case is simply too easy to make. That does not mean the market must collapse just that it doesn't take too much heavy lifting for an adverse scenario to develop.
As for the reverse mergers, in a way these aren't even investing in China. It is China of course but these companies find shell companies here (where did all these shell companies even come from?), merge into them, take a Chinese name and list on a US market. I've heard that one dynamic with these is that the penalty for this sort of scam in China (when it is a scam) is death but not so in the US so they are willing to try it in the US but not at home.The best course of action with the reverse mergers is simply to avoid them. Chanos said this in the video and I have been saying this for ages.
I've not heard Chanos ever talk about energy, materials or industrial companies that are real companies in China that have been around for a while that play into the improving quality of life, the ascendancy of a middle class and the real volume of rural to urban migration. I think these are the best places to look.
China is a major driver of the global economy. The population is massive and the country is going through what appears to be a major transformation which I believe is a net positive as a long term investment destination. On the flip side if the transformation is major then it is only logical that some aspects will be badly mishandled and it is these segments that should be avoided. The country also has a bit of a demographic problem such that the one child rule may be changed. If that happens it would cause another distortion which at this point I am not sure if it would be a positive or negative factor.
Our exposure is quite modest by virtue of China's weight in the Market Vectors Coal ETF (KOL) and the iShares Emerging Market Infrastructure Fund (EMIF). If the toll roads were more easily (read cheaply) traded I would not hesitate on one in particular right now.
The picture was taken by my buddy BT and is of course in Hong Kong.
6 comments:
If deposits are so large, how will housing blow up? If prices drop there will be more pressure on the owner to sell, although less if the property is earmarked for a holiday home or (much more likely in China) as a place for the son to move to when he gets married.
Of course there will be localized crashes, periods of stagnation or falling prices etc, but not on the scale we've recently 'enjoyed' in the West. China is such an enormous country that it could lose a few dozen cities and life would carry on as normal for the rest of the world.
Conversely, if the whole place were to suffer a housing/economic crash, many other countries would be sad pandas for decades afterwards
I have a friend who was a Chinese national, with close associations still in China. They have a Central Gov't. which supports multiple home ownership as a speculative tool. Sound familiar? Development for Central rural China is the current focus of the central gov't. It's easy to forget, this is not anything near a free market economy. The gov't. is still playing a major role in all aspects of the economy. Roger is right about the ascending middle class. My friend is a PhD engineer. He has spoken of average intelligence peers who have opened day care centers and become multimillionaires over the past two decades. I don't have clue how this story will end, but you can not look at our economic history as a predictive tool.
Here is another take on China by Kevin Carter (partner of Burt Malkiel). Two main points: 1) everyone is badly underweight in China and 2) the indexes are badly broken. Reaction?
http://www.indexuniverse.com/sections/features/9278-alphashares-carter-float-adjustment-is-evil.html?utm_source=newsletter&utm_medium=email&utm_campaign=IndustryNews
is this a GDP versus market cap argument?
I'm not a fan of the thought process but I'm not sure why other than its not intuitive to me.
I'm not a fan of reworking indexes because something hasn't been working. at some point that which is worked very badly will work will in the future. too much benchmark changing will likely result in chasing heat.
I've read that they also have an energy problem. The cost of coal has gone up but the Government wont let the electricity generators raise their prices, so they are closing down.
http://www.theglobeandmail.com/report-on-business/commentary/jeff-rubins-smaller-world/are-chinas-factories-running-out-of-power/article2032648/
thank you for leaving the link. It seems to me that China is trying to address this as the oil and resource companies are doing more and more overseas like in Africa. As far as coal it has long been known that Mongolia will have to play a role here (which would be 95% of the case for buying the Market Vectors Mongolia ETF if it ever lists).
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