Thomas Friedman: “Is China the next Enron?”

Oh no, here we go again! Is China about to soar or plummet? We are literally up to our eyeballs in punditry about the fate and future of China. Friedman, the only columnist I know to have a metric named after him, has to get into the act, of course. In this instance, I admit, I tend to agree with him.

Reading The Herald Tribune over breakfast in Hong Kong harbor last week, 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 Mr. Chanos can find a way to make money shorting them, God bless him. But after visiting Hong Kong and Taiwan this past week and talking to many people who work and invest their own money in China, I’d offer Mr. 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 Sunday called “excessively rising house prices” in major cities, or what some might call a speculative bubble ripe for the shorting. In the last few days, though, 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 in spades — 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 us).

He goes on to mildly ridicule Chanos (who can’t be all bad, since a recent article about him in Politico actually linked to one of my posts!). And I have to say I think Friedman is right. We’ll see some deflating of the asset bubble and some serious pain. But nothing is about to collapse. Not China. Not the US.

We are being deluged with bad news about China, and yesterday’s Google story only made China look worse. “Bubbles” and “house of cards” and “built on sand” are among the metaphors that seem to be co-joined to so many discussions of China. Yesterday, I found myself so convinced that I actually went and bought a few hundred shares of a stock, FXP, that shorts the Xinhua index. So many bad vibes being sent out by so many pundits! Surely China has got to come careening downward.

I was lucky and made a profit (about enough to buy me a meal at Bellagio). But this morning I sold my shares and am long China again. I stepped back and realized I was getting sucked into the hype that’s building. And whenever there’s a common perception of inevitability, usually exactly the opposite happens. And it’s just as easy to get sucked into the counter-hype – the euphoric predictions of an economically invincible China assuming the mantle of world leadership. So hard to see what the real situation is amid all the clutter and noise.

I know, we’ve talked this to death. We don’t need to have another long food fight about it. So then why do I keep posting these kinds of articles from both sides after so many interminable threads? Because I like to know what the influencers are saying (even questionable ones like Friedman), I like to know both sides, I like to compare opinions and expose dumb arguments and applaud smart ones. This one is probably on the smart side. Take it or leave it. Time will tell.

The Discussion: 10 Comments

“whenever there’s a common perception of inevitability, usually exactly the opposite happens.’ You said it right Duck!!! But what is happening now is not people are shorting China, but long China like no tmr!!!and by saying short, it does not nessirily means “collaspe”, what Jim Chanos said on NBC was long time deflation, collaspe of “hot” commodity and oil price. He does not care an iota about polotics.

January 15, 2010 @ 1:55 am | Comment

Friedman’s utility at this point is his use of the China meme to provoke some kind of re-awakening of the American can-do spirit (yes, in his simplistic op-ed fashion, but think of who his wide audience is). Following his recent columns in the NY Times, it is clear that his focus is domestic and he views China as the usual foil to drive American competitiveness (sort of a friendly enemy). Like so many others, he is using the idea of “China” to further his preferred political agenda in the US. And as an aside, I have to agree with him, the US desperately needs to remove its head from its partisan ass and get moving on the energy technology front!

January 15, 2010 @ 3:00 am | Comment

PB, well said.

Steven, there’s actually a huge amount of buzz from both sides, the shorts and the longs. It’s kind of crazy – two groups looking at the exact same set of facts and each seeing something wildly different. (Then again, that happens all the time. Look at how progressives view Gitmo and how the Cheneyites view it. The progressives, of course, are right.)

January 15, 2010 @ 3:14 am | Comment

Dunno how applicable this is here. Young lass is in the west (I guess the South Pacific is “west” ;-)) and does business online. Started by using eBay but now look at the sites she uses…
Nary a mention of Google…

January 15, 2010 @ 5:38 am | Comment

What I like about this blog is that the author doesn’t take an extreme view (China is the next world leader v China is a deck of cards). In reality, guessing China’s future is a bit like betting on a horse race. There are so many people, so many outside factors, with so many complex infitine ways of them all interacting with each other etc.

But one thing to keep in mind is that Jim Chanos is no fool. People who dismiss him should realize that billionaires are generally very clever people. On the other hand that doesn’t mean he is right 100% of the time either.

The report from Pivot Capital made very interesting reading. I have yet to see a good rebuttal of it. Thomas Friedman’s rebuttal doesn’t refer to it in his article. It is clear that he has not read it. For instance, he raises the issue of China having large reserves: “Never short a country with $2 trillion in foreign currency reserves.” Yet the Pivot Capital report specifically goes into why China’s reserves cannot for the most part be spent. Thomas Friedman in no way deals with the substance of Pivot’s argument on this point (or any major point.

I am not saying Pivot’s report is correct, but if one were marking it as if it was a college paper it would get a very high mark. It is very well researched & argued.On the other hand, Friedman’s op-ed looks like it was written by someone with half an hour to spare.

January 15, 2010 @ 4:44 pm | Comment

Tangentially topic related.

“Macroeconomic: Google has obtained insider info on the financial position of some Chinese Banks and the superhuman brains of P and B have come up with a new algorithm predicting that the Chinese system is going to collapse tomorrow. They leave while they are still in time, collecting bonus World goodwill and defying a CCP that will not be there this time next year anyway…”

From Chynayouren. More hypothesis there. You can even vote your favorite.

January 16, 2010 @ 6:45 am | Comment

Thanks for that, Eco. The best part of that post is in reference to the idea Google is leaving because of low profits in China:

this still doesn’t make any sense from a business point of view. In that case they would have just uncensored, get sent away with all the PR hoopla, and all the while not cross the CCP too much with the public accusations of email hacking. Because there is ABSOLUTELY no business interest in Google forcing things in a way that even and all the G services will be blocked. China can do that easily with the GFW.

He’s right. This wasn’t about poor profits. Google was totally, through-the-roof incensed.

January 16, 2010 @ 7:54 am | Comment



January 16, 2010 @ 8:14 am | Comment

James Chanos doesn’t need China to collapse to make money shorting it. It sounds like you and Friedman agree with Chanos more than you think.

January 18, 2010 @ 7:11 am | Comment

Check out Friedman’s “Part II”!!!

January 20, 2010 @ 7:31 pm | Comment

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