Is China’s Economy Hitting a Great Wall?

Jim Chanos, who operates the Kynikos Associates hedge fund, is a legendary
short-seller known for his exhaustive research and good timing. He made a
fortune by shorting the stock of Enron.  But over the past year, Chanos has
been looking at perhaps an even bigger short China.  He believes the country
is in the midst of an extreme real estate bubble.  The major concern is over
the speculative activity with high-rise office buildings and condos (Chanos gave
some of his views on this on CNBC on Tuesday). Consider that Chanos has a strong
grasp of real estate markets he made big profits during the Texas bust in the
1980s as well from the subprime blowup in 2008-2009. As for China, he thinks a
pop of the bubble could have severe consequences.  The impact would ripple
across the globe, especially in countries like Australia, Canada and Brazil. 
There also would be a sudden crash in commodities prices, such as with iron ore
and copper.  Of course, China is the biggest importer of a wide array of
commodities. So, is this just crazy talk from a short-seller who is pushing his
trade?  Interestingly enough, the Chinese government also seems to have
concerns about the economy.  With inflation becoming a problem, it has been
ramping up interest rates and tightening capital requirements.  While prior
efforts have appeared to be temporary, there are now signs that the actions are
having an effect.  For example, real estate prices are starting to decline. Its
also a good bet that the Chinese growth rate is likely to fall off from its
9%-12% clip.  And yes, investors are getting jittery as many well-known Chinese
stocks have had a tough time lately.  On Tuesday, there was a big selloff in
the Internet high-fliers.  Sinas (Nasdaq: SINA ) shares were off 9.5% and
Baidus (Nasdaq: BIDU ) stock saw a drop of 5.2%. But since China has a highly
controlled government, wont it be able to manage a soft landing?  Perhaps. 
But Chanos points out that a whopping 70% of the countrys gross domestic product
is in fixed-asset investment.  This is much higher than the percentages in
Japan during the late 1980s. Other top investors are getting cautious on
China.  A notable one is Jeremy Grantham, who is the chief investment officer
of the $107 billion Grantham Mayo fund.  He thinks there is a 25% chance that
China will slow down over the next year.  In light of all this, it may be a
good idea for investors to lessen some of their enthusiasm in China-related
stocks. Tom Taulli's latest book is " All About Short Selling " and his
Twitter account is @ttaulli .  He does not own a position in any of the stocks
named here.