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China-Russia on Treadmill to Growth Crushing Chanos Bubble Bets

asiablues's picture




 

By Dian L. Chu, Economic Forecasts & Opinions

President Barack Obama and Russian President Dmitry Medvedev signed the biggest nuclear arms pact in a generation last week. The so-called New START is hailed by Obama as a major step to show the world that the U.S. and Russia have mended their troubled relationship.

Meanwhile, Russia and China have also formed alliance to help each other increase their clout in global affairs, as visiting Chinese Vice President Xi Jinping who met with Medvedev in Moscow last month indicated. Xi is expected to succeed President Hu Jintao in 2012 as China's top leader.

Old Foes = New Allies

Russia has watched China's continued economic growth and advancing political clout with a mix of awe and unease. Nevertheless, economic and trade cooperation between the two countries has grown quite steadily  in recent years. 

The final settlement of their 4,300-km shared border in July 2008, after more than 40 years of dispute, also helped spur the advancement of bilateral cooperation.

An Economic Paradigm Shift
Presidents Hu and Putin have moved quickly on an agreement to enhance mutual political trust and advance pragmatic cooperation, and signed agreements totaling $1.6 billion in the technology, energy and infrastructure sectors.

China is already Russia's largest trading partner. The annual bilateral trade volume has increased from a few billion dollars back in the 1990s to $58 billion as of 2008.

Underneath the geopolitical and trade pacts, this newly elevated Sino-Russian alliance seems to also suggest the beginning of an economic paradigm shift for both countries.

"A Huge Fiscally Dysfunctional Iceberg"
China used to consider the euro as a top option to diversify its massive reserves from the dollar, but has grown quite wary of the euro zone debt situation.

Zhu Min, deputy governor of the People’s Bank of China, last month told a conference in Hong Kong that he viewed Greece as just the tip of a huge fiscally dysfunctional iceberg, one likely to swallow up growth opportunities in Europe for several years to come.

“Unsustainable” Sovereign Debt Levels
Elsewhere, among the established and generally considered “low risk” countries, national debt and deficit has reached an unsustainable level. The U.K, at 14.2%, and U.S. with 11.92%, now rank No. 8 and 14 respectively based on budget deficit percentage to GDP in 2010 by country.

As a comparison, the already bankrupt Iceland and Ireland--one of the "I's" in PIIGS countries--rank behind the U.S. at No. 9 and 10, respectively.

Typically, a “sustainable debt” is one that grows slower than the GDP over time. This is part of the rational that the European Union requires its member countries to keep budget deficits below 3% of GDP as it is the general assumption of a long-term growth rate.

Crisis Transferred - Banks to Governments
In essence, the 2008 financial crisis has been transferred onto the government’s balance sheet from banks’ making the sovereign debt quite possibly the next major crisis across the Europe, the U.S. and U.K.

This has set off alarm bells among the developing countries, which typically have significantly lower levels of debt.  That alarm signal partly prompted Zhu Min stating:

“The U.K. is weak. America itself is weak, because in a two-to-four-year horizon, U.S. debt will climb to 110% [of GDP] and stay there for a while…Now they find nobody can save them.”

Counterbalance - Great Hope for Investors
Realizing the risks of the Western economy, it is logical for the neighboring China and Russia to be looking to each other for economic and trade alliance, in addition to expanding domestic consumer demand.

The World Bank last month raised its growth forecast for China this year to 9.5%, while Bank of America Merrill Lynch projected Russia, the world’s biggest energy supplier, is poised for a growth rate of 7% this year.

This new level of cooperation between the two Eastern powers would be good news for investors as they form a counterbalance to the West, which is facing serious fundamental problems that could lead to a total financial disintegration.

Treadmill to Growth Crushing Shorts
Lately, contrarian investor Jim Chanos is once again making headlines proclaiming “China’s treadmill to hell...will break this year and the bubble will pop.”

It is quite understandable how Mr. Chanos may have some sense of anxiety, since his fund--Kynikos--is shorting mainly Chinese developers and construction suppliers as disclosed in his latest interview. These sectors probably have not shown as much downside as he’d envisioned, primarily due to promising economic data coming out of China.

Buy On The Dip - Real Estate
All countries, including China, go through the normal up-and-down business cycle, which is nothing catastrophic as suggested by Mr. Chanos. As such, China's economy and real estate sector could have a correction and cooling-off period ahead with Beijing attempting to rein in liquidity and inflation.

Nevertheless, with strong long-term growth prospect intact, buying on the dip via Chinese real estate related investment vehicles would fit nicely into a balanced long-term portfolio.

Yuan, Ruble, Gold & Metals
With the euro looking in dire straits even with the $61 billion EU-IMF Greece bailout pact, sterling in worse shape than the dollar, China will likely diversify more into gold, other developing market currencies, and promoting their own currency as alternatives.

From that perspective, yuan and ruble could vastly appreciate against the dollar over time just from the sheer growth and relative stability. Precious metals, gold in particular, and base metals could also benefit.

Commodities in general seem to have fully priced in a V-shaped recovery; nonetheless, it is still advisable for investors to allocate about 5% through physical holding, physical ETFs and/or longer-dated options, as part of a well-diversified portfolio.

Hot Now - Russia Bonds
Meanwhile, analysts estimated many dedicated emerging markets funds have set aside plentiful cash in order to snap up Russia’s first foreign-currency bonds since 1998. A record $18.8 billion had flowed into emerging debt funds in the first quarter for the new bond.

Russia’s government said last year it may borrow as much as $17.8 billion abroad in 2010 to help its budget deficit and establish a new benchmark for corporate borrowing.

Investors interested in Russia should bear in mind that the country’s revenue and GDP growth tends to be more sensitive to the volatile crude oil market, as discussed in my earlier article - "Sovereign Risk and the Price of Oil."

Rethink and Be Prepared
In light of a plausible Western economic and dollar crisis, an event China and Russia, the de facto leaders of the developing world, seem to be actively preparing for, it is likely that China and Russia would weather just one such financial tsunami better than others.

That possibility warrants investors to rethink the conventional wisdom of associating established economies with lower risk and position portfolios accordingly.

Economic Forecasts & Opinions

 

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Mon, 04/12/2010 - 16:23 | 296959 Bonesetter Brown
Bonesetter Brown's picture

Any China permagrowth case must provide answers to two key questions:

What happens to FDI when Western economies go bust?

What happens to China's export growth when Western economies go bust?

It makes sense for the Chinese and the Russians to tie up economically, and it is more important for Russia than it is for the Chinese, but to suggest that this in anyway innoculates China from Western economic/financial contagion is a very big stretch.

Mon, 04/12/2010 - 19:45 | 297242 Seer
Seer's picture

And what happens to China when it runs out of energy? (yes, it can be delayed, but the time horizon is much sooner than later)

Mon, 04/12/2010 - 16:20 | 296953 verum quod lies
verum quod lies's picture

China is an export dependent economy that pegs its currency to the USD. Culturally people are not suppose to complain, and especially they are not suppose to point out any faults of the family, country, party chairman of the week, etc. (they can and do point out others faults, just not the family or extended family), which is almost the opposite of the average American (ignore the MSM, which is acting Chinese on the economy because they are in the tank for Barry Soetoro and the current alien occupation government). Therefore, based on basic cultural inclinations alone, you would be a fool to think that Chinese numbers are less positively biased than say U.S. numbers (and, yes, I don't trust many U.S. ones). Also, as Rogoff and Reinhart suggest, be careful when exclaiming "this time is different"; but, given current debt and promised benefits loads of its primary customers (e.g., the U.S. , Russia, etc.), this time is not just different but seems downright unique for export dependent economies (and add to that the fact that trade wars are more likley than at any time in my memory; and that tends to hurt net exporters more than net importers, hence the reason why a net importer might do it in the first place). Furthermore, as stimulus ends, and it will end, certainly external demand will wane. Finally, how many empty buildings does a political commissar need (remember, government bureaucrats tend not to be the best allocators of capital)? Accept what was just written as truth for a moment, and ignore your personal feelings for a moment about the U.S., China, Russia, or any other country, and think like a true capitalist/Chanos: Is China and its stock market a short, a long, or a neutral? I would have to agree with Chanos, it is really a question of arguing over timing, and that is tricky with a macro type bet.

 

Mon, 04/12/2010 - 12:13 | 296471 Seer
Seer's picture

All countries, including China, go through the normal up-and-down business cycle, which is nothing catastrophic as suggested by Mr. Chanos.

Assumes  that we're NOT in a greater cyclical cycle, that this isn't the tail end of the BIG cycle, the end of growth as we've known it.

The "new" business cycle is that of the slinky decending down stairs: there may appear to be up-trends, but these are only momentary, the trend is down (contraction).

Mon, 04/12/2010 - 11:41 | 296426 Gordon Freeman
Gordon Freeman's picture

Russia-China cooperation--one question:  what's in it for China?

 

 

Mon, 04/12/2010 - 12:06 | 296465 Seer
Seer's picture

Russia + energy <-> China + products

 

Mon, 04/12/2010 - 11:07 | 296380 BlingBlingBen
BlingBlingBen's picture

This article is really bad... are hacks for the Chinese government writing this stuff?  I will take Chanos all the way to the bank.

Mon, 04/12/2010 - 10:52 | 296352 AllSingingAllDa...
AllSingingAllDancingCrapof theworld's picture

Really?

How long can China build skyscrapers at $10 billion a pop that sit empty for years on end, even in a population of 1.2 billion?

Not to mention those hundreds of millions of horny dudes who have nothing (and no one) to do because of the kill-girl-babies one-child policy?

Recipe for long term gotterdamerung.

Mon, 04/12/2010 - 11:34 | 296420 tmosley
tmosley's picture

How long?

As long as they have positive net savings.

Mon, 04/12/2010 - 19:42 | 297236 Seer
Seer's picture

Yes, as an entire country.  Thanks for pointing out the realistic fundamentals: while govt types can alter the pace, they cannot alter the trajectory.

I would wager, however, that China's current surplus can't hold out for that long given its internal spending ("stimulus") and its voracious appetite for importing resources (energy being key).

Mon, 04/12/2010 - 10:51 | 296351 Leo Kolivakis
Leo Kolivakis's picture

Prediction: Chanos will cover his positions faster than you can say "OPA!"

Mon, 04/12/2010 - 10:46 | 296345 Howard_Beale
Howard_Beale's picture

Chanos could easily be early by a year or two but when the pay-off is big, you get in early. The first guy to bet against subprime started in 2005 and it took him some time to prove he was right. You have to stick to your guns if you really believe in a major play of this proportion and not sweat the short term gyrations.

Right or wrong, Chanos isn't going to step back from his position. Personally, I think he is right.

Mon, 04/12/2010 - 10:31 | 296326 caconhma
caconhma's picture

Communist China economic & political system is not perfect but it has a lot of room to grow before it growth will come to holt.

As for real estate, as I stated many times, even if 10% of China ~1B peasant population will move to cities in the next 5-10 years, the Chinese real estate bubble will not be a problem.

As for Russian corrupt leadership, China does "understand" their problems and will be ready to "accommodate" it.

 

Mon, 04/12/2010 - 19:37 | 297229 Seer
Seer's picture

it has a lot of room to grow before it growth will come to holt.

Please do tell how you come to this conclussion.

Mon, 04/12/2010 - 10:24 | 296311 steve from virginia
steve from virginia's picture

 

"Russia is already China's largest trading partner,"

Wrong, the US is, with almost 7 times the gross exchange as the $60 suggested; it's not called 'Chimerica' for nothing.

http://www.census.gov/foreign-trade/balance/c5700.html#2009

"Elsewhere, among the established and generally considered “low risk” countries, national debt and deficit has reached an unsustainable level. The U.K, at 14.2%, and U.S. with 11.92%, now rank No. 8 and 14 respectively based on budget deficit percentage to GDP in 2010 by country.

Wrong, China has been and is the out and out greatest beneficiary of gross borrowing worldwide. Who would buy Chinese finished goods without cheap (Chinese) credit? The four- letter word that most accurately represents Chinese goods is, 'Junk'.. As credit becomes more expensive - because it is losing its purchasing parity with cash - Chinese junk is becoming harder to market. The outcome is a China trade deficit.

This article suggests that China perhaps has found a replacement sucker for the US.

"The World Bank last month raised its growth forecast for China this year to 9.5%, while Bank of America Merrill Lynch projected Russia, the world’s biggest energy supplier, is poised for a growth rate of 7% this year."

Chinese growth figures are flat- out lies. Why would the Russian figures be any different?

"It is quite understandable how Mr. Chanos may have some sense of anxiety, since his fund--Kynikos--is shorting mainly Chinese developers and construction suppliers as disclosed in his latest interview. These sectors probably have not shown as much downside as he’d envisioned, primarily due to promising economic data coming out of China."

Mr Chanos' biggest problem with shorting China will probably be actually collecting on his shorts. Good luck on ya, mate!

Mon, 04/12/2010 - 11:52 | 296447 spyware-free
spyware-free's picture

I read it as

"China is already Russia's largest trading partner."

Unless asiablues corrected the article between the time when you read it and I did I suggest you rethink your post.

Mon, 04/12/2010 - 10:52 | 296354 caconhma
caconhma's picture

steve, you are incorrect.

To understand China, its domestic and geopolitical objectives, one must look at Stalin's Soviet Union back in 1930s. However, the present Chinese leaders are much more flexible an sophisticated than illiterate and dogmatic Soviet leadership back then.

Mon, 04/12/2010 - 19:39 | 297232 Seer
Seer's picture

To "understand" the trajectory of ANY country you need to understand it's resources (energy being key).  The past was the past, and, as those prospectus statements say, not a guarantee of future results.

Mon, 04/12/2010 - 10:11 | 296295 Kina
Kina's picture

There is always promising economic data coming out of China, and probably no less manipulated than the economic data coming out of the US.

 

I wouldn't write Chanos's bet off yet.

 

One thing about China is they understate problem issues by very large degree. If they even mention something as an issue it often indicates it is a major problem.

 

They have mentioned property bubbles and inflation.

Mon, 04/12/2010 - 10:26 | 296315 Paladin en passant
Paladin en passant's picture

...and let us add local political-entity debt fueled by that property bubble, a bubble within a bubble.  A trillion or so of wealth going poof is meaningful, even to the Chinese.  In China you don't get to retire in style when you've made massive, embarrassing mistakes...you get executed.

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