Deciphering the strength of the Chinese economy will also play a major role in formulating our view of any future relative strength of emerging. My colleague, Edward Chancellor, strongly suspects that the Chinese economy is dangerously unbalanced and very likely to come unhinged in the next few quarters, surprising the pants off investors.— Jeremy Grantham, July 2009 GMO Quarterly Letter
Edward Chancellor, assuming it's the same person, is the author of Devil Take the Hindemost so he knows his stuff—at least when it comes to history. Is there really a risk that China may face serious problems within a few quarters?
The important point, as Grantham suggests, is that this will be a big negative surprise for the markets. The most at risk, as usual, as those overloading on cyclicals (such as commodity businesses or capital goods companies.)
Although some seem to follow China by observing its stock market, that is totally meaningless as far as I'm concerned. The stock market in China is close to early 1900's, or late 1800's, NYSE and resembles a casino more than anything. To see how much of a joke the American stock exchanges were at that time, recall how "serious investors" only invested in bonds during that era. The insiders and wealthy owners manipulated the markets so much that the outsider had little chance. There was nothing like modern insider trading laws and, well, outsiders "invested" on rumours more than anything. Similarly, Chinese markets right now are like that. Most of the listed companies are government-owned with limited float, poor transparency and spread of information, and shareholder rights are well, um, still being developed. You'll see a lot of people investing based on rumours of what the government may or may not do.
The proper thing to observe in China is their economy. Although stock markets aren't correlated very much with economies, I believe the correlation is really high in the case of foreign markets and the Chinese economy. A lot of market participants are betting on high Chinese growth so stock markets in America are influenced by that. Even politicians in developed countries are pinning their hope on countries like China and India these days so all this is widely believed and priced in.
Even if you don't believe in the bear case, you should at least spend some time thinking about whether you are vulnerable if the bears are right. I have been bearish on China (and others like India and Russia too) so I have never contemplated any investment that is tied to those countries (this meant forgoing huge profit opportunities in the last few years.) Yet, recently, I started looking at Japanese stocks and I have started to wonder what will happen to Japan if China faces problems. I have decided to be very cautious about any Japanese investment until I am confident with China. Tags: China