Edward Chancellor, author of an excellent book on past financial manias called Devil Take the Hindmost: A History of Financial Speculation (my review is available here), believes that investors will be grappling in the future with the bursting of a bubble, this time in China. In a recent article on the GMO website, Mr. Chancellor outlines ten reasons why China is in the midst of a great speculative mania (registration required). Among them:
- A compelling growth story: China recently overtook Germany as the world’s number one exporter and Japan as the number two economy. Its economy has been growing at a torrid pace for decades and investors have no trouble extrapolating that growth far into the future given China’s large population and lower level of development.
- An Investment Boom: China is investing massive amounts of money in infrastructure but not always efficiently as you can see on the news clip on Ordos, a town built to house a million residents but sitting practically empty.
- Easy credit: Interest rates in China are kept far below the natural rate leading to speculation in stocks and real estate.
- Rampant credit growth: Unlike developed economies, Beijing is able force banks to lend and the banks responded by lending massive amounts of money, which likely resulted in a decline in underwriting standards.
- Rapidly rising property prices: Chinese stock markets are experiencing high stock turnover, rising number of IPOs and strong early trading gains. Meanwhile, property markets are overheating despite a massive inventory overhang.
Mr. Chancellor is not alone. In a recent talk, Jim Chanos, who famously shorted Enron when it still was a Wall Street darling, explained why he thinks China is a massive asset bubble. Vitaliy Katsenelson, author of the excellent book Active Value Investing (read my review here), is another skeptic. He calls China the “mother of all Black Swans” and has written numerous articles (such as this one) on the subject.
In a span of just ten years, investors have dealt with the aftermath of an internet bubble and a real estate bubble. Will the China be next?