2010 October 08 Friday
Jim Chanos: China And Law Of Diminishing Returns

Back in January 2010 billionaire hedge fund investor Jim Chanos gave a good talk on the distortions in China's economy. China's central planners are throwing more and more resources at trying to maintain its growth rate. They can not sustain this approach and he sees a big bubble waiting to burst. Worth watching.

The best quote in the speech: "China has embraced capitalism to keep in place the socialist elites whereas in the West, apparently, we have embraced socialism to keep in place the interests of the capitalist elites". How true.

Chanos outlines the scale of the Chinese bubble. For example, the office space build-out was on course back in January to create 5 feet by 5 feet of office space for every man, woman, and child in China. The size of the overbuild is breathtaking.

He also wonders at the end whether China can move up the value chain the way, for example, South Korea has done. Beyond the current bubble that will matter most in the long run.

Share |      By Randall Parker at 2010 October 08 08:41 PM  China

NotProgressive said at October 11, 2010 12:30 AM:

China uses Sovereign monetary principles, e.g. state banks. China also has a mix of private banks. It would be interesting to see which banks are causing the bubble in real estate. In the West, private banks cause bubbles because new money is created with loans. Since new money can be easily made, bubbles and inflation are created. On the downside, when bubbles collapse, or people start worrying, money finds shelter and the economy enters a depression.

Public banks can follow saner fiscal policies by stronger control over lend rates. For example, public banks can stop lending if somebody already owns two homes. Or, to stop the money supply from growing too fast, public banks easily reduce the making of loans. Conversely, in a depressionary situation, public banks can issue money straight into the economy, greenback style.

Western economists conflate western thought onto China. But, China fixes their exchange rates to prevent western bear raids. China makes their private banks hold large dollar reserves. Since China operates with Sovereign/Chartalist money, a lot of economist get it wrong. In the mid 90's all I heard from pundits about China was how they would become a great consumer of American products. Ha. They became a great producer of products and export to the U.S.

China prints Yuans from nothing, and trades them for excess dollars their manufacturers hold. Those same dollars are then recycled back to the U.S. to buy treasuries. In the meantime, those Yuans enter into circulation, but they are largely non-inflationary if the Chinese economy is growing. Any infaltionary pressures are probably localized as their entire economy needs more Yuans to develop. China prints debt free money, to buy debt based dollars. Those debt dollars then go to toward U.S. treasuries putting Americans in debt bondage. American went into debt to create new dollars, and in debt again for the bondage to China.

China is playing the game well. Now that world class industries are locating to China, they can move up the food chain quickly. Higher levels of consumption in the interior could be had easily by financial policy. With sovereign money, simple direct spend on infrastructure in the interior would spur consumption. Too many Westerners are whistling past the graveyard in their analysis of China. Sovereign money, and a high IQ, high cohesive population, give them many advantages. The big downside is the inverting population due to one child rule. China has about 30 years to suck as much wealth and technology out of the West as it can.

Engineer-Poet said at October 12, 2010 8:18 PM:

The biggest risk is that China is likely to react to systemic problems by trying to divert popular anger to external enemies.

no i don't said at October 13, 2010 2:32 PM:

"The biggest risk is that China is likely to react to systemic problems by trying to divert popular anger to external enemies."

Very unlike the U.S., I suppose Ha, ha, ha...
Did you just bite your tonge there E.P.? Or was all your sentence just a "typo"?

Anonymous said at November 5, 2010 12:56 AM:

The one fact Jim forgot to mention is that China can implement a change in monetary policy overnight to take corrective measures, wherein the States every change has to go through the political "red tape" machine. Time is of the essence in monetary decisions?

Mark said at November 5, 2010 6:29 AM:

I was watching one of Chanos's interviews on another site with great interest until I got to the point where he said all numbers in China are faked, and that the reason they faked numbers was that "China is all about saving face".

This guy is clearly utterly clueless about China.

Just about ALL economic policies in China can ultimately be traced to one single objective. It is almost all about creating jobs for the masses. This is necessary in China so as to prevent large scale chaos, which have the potential to turn into bloody revolutions.

It is not hard to see China has one of the most pragmatic leaders on this planet. When it comes to the economy, nothing in China is "all about saving face".

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