Betting against China in 2010 is a bad mistake for investors and companies alike. Here are three reasons why Jim Chanos (called Tyco and Enron bust) is wrong and Jim Rogers (co-founder Quantum Fund, Commodities expert) is right about the strength of China’s economy:
1. No Real Estate Bubble. When buying residential properties, consumers in China have to put down 30% before taking out a mortgage. For a second home, they have to put down 50%, no matter what their net worth. Therefore, China doesn’t have the reckless consumer behavior that occurred in the U.S. Mortgages are held by the original lenders (no securitization of mortgages)
2. The second way Chanos is wrong about China is that he, like most economists and Wall Street analysts, underestimates income there. China Market Research Group, estimates that Chinese consumers will come to account for half of the economy within the next three to five years as the role of exports diminishes. Incomes are grossly underreported in China. A simple look at how accounting works will show why. Whereas in the U.S. individuals must report their income to the Internal Revenue Service every year, in China all individual tax is reported and paid for by companies, except for that of high earners. Many Chinese companies limit the tax they pay by reporting low salaries and then paying their employees higher amounts while accounting for the difference as business expenses like phone bills. Many companies pay for housing and cars for their employees, a holdover from the old system of state-run businesses
3. The third thing Chanos gets wrong about China is the notion that the yuan is likely to appreciate. In the long term, however, once the world’s economy stabilizes, appreciation of the yuan might make sense
Separate Analysis on the Yuan
The Financial Times details the reasoning in favor of a one off yuan appreciation.