Tuesday, December 15, 2009

On chinese overcapacity

Jim Chanos (a legendary short seller - if anyone can find me a book by him or about him I will be very appreciative) pointed out on CNBC today that it's very ironic that people in the US, who are so skeptical of government regulation and its ability to manage the economy, are willing to put so much faith in a 25 person Chinese politburo to successfully manage the Chinese economy. It's a good point.
I've mentioned a few times on this blog that China has way overbuilt and seems destined for a collapse, and that I'm scared to bet on it. Chanos reaffirmed that viewpoint and believes it's going to be even worse than that. He noted that Chinese firms underdepreciate, so overcapacity doesn't look so bad and earnings stay high. He also noted that bubbles are formed not on overvaluation but overexpansion of credit, and China has significantly overexpanded its credit (and its valuation). He noted that 35-50% of China's GDP is construction, and construction has a rate of return, and if the rate of return is low, the country's going to slow. He sees China as another subprime situation ("Dubai times 1000").
He's worth listening to. Be careful.
The interesting question, of course, is what happens to the Yuan, and how does this affect the rest of the world? Will China try and weaken its currency more and more to try and get the rest of the world to take its goods? Will it simply not strengthen to where it should be strengthening to currently? Does this help or hurt the American economy (flooding us with cheap goods makes everything cheaper for us but also hurts manufacturing...)

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