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January 13, 2010
Is China the Next Enron?
By Thomas L. Friedman
Reading The Herald Tribune over breakfast in Hong Kong harbor last week, my eye went to the front-page story about how James Chanos — reportedly one of America’s most successful short-sellers, the man who bet that Enron was a fraud and made a fortune when that proved true and its stock collapsed — is now warning that China is “Dubai times 1,000 — or worse” and looking for ways to short that country’s economy before its bubbles burst.
China’s markets may be full of bubbles ripe for a short-seller, and if Mr. Chanos can find a way to make money shorting them, God bless him. But after visiting Hong Kong and Taiwan this past week and talking to many people who work and invest their own money in China, I’d offer Mr. Chanos two notes of caution.
First, a simple rule of investing that has always served me well: Never short a country with $2 trillion in foreign currency reserves.
Second, it is easy to look at China today and see its enormous problems and things that it is not getting right. For instance, low interest rates, easy credit, an undervalued currency and hot money flowing in from abroad have led to what the Chinese government Sunday called “excessively rising house prices” in major cities, or what some might call a speculative bubble ripe for the shorting. In the last few days, though, China’s central bank has started edging up interest rates and raising the proportion of deposits that banks must set aside as reserves — precisely to head off inflation and take some air out of any asset bubbles.
And that’s the point. I am reluctant to sell China short, not because I think it has no problems or corruption or bubbles, but because I think it has all those problems in spades — and some will blow up along the way (the most dangerous being pollution). But it also has a political class focused on addressing its real problems, as well as a mountain of savings with which to do so (unlike us).
And here is the other thing to keep in mind. Think about all the hype, all the words, that have been written about China’s economic development since 1979. It’s a lot, right? What if I told you this: “It may be that we haven’t seen anything yet.”
Why do I say that? All the long-term investments that China has made over the last two decades are just blossoming and could really propel the Chinese economy into the 21st-century knowledge age, starting with its massive investment in infrastructure. Ten years ago, China had a lot bridges and roads to nowhere. Well, many of them are now connected. It is also on a crash program of building subways in major cities and high-speed trains to interconnect them. China also now has 400 million Internet users, and 200 million of them have broadband. Check into a motel in any major city and you’ll have broadband access. America has about 80 million broadband users.
Now take all this infrastructure and mix it together with 27 million students in technical colleges and universities — the most in the world. With just the normal distribution of brains, that’s going to bring a lot of brainpower to the market, or, as Bill Gates once said to me: “In China, when you’re one-in-a-million, there are 1,300 other people just like you.”
Equally important, more and more Chinese students educated abroad are returning home to work and start new businesses. I had lunch with a group of professors at the Hong Kong University of Science and Technology, or HKUST, who told me that this year they will be offering some 50 full scholarships for graduate students in science and technology. Major U.S. universities are sharply cutting back.
Tony Chan, a Hong Kong-born mathematician, recently returned from America after 20 years to become the new president of HKUST. What was his last job in America? Assistant director of the U.S. National Science Foundation in charge of the mathematical and physical sciences. He’s one of many coming home.
One of the biggest problems for China’s manufacturing and financial sectors has been finding capable middle managers. The reverse-brain drain is eliminating that problem as well.
Finally, as Liu Chao-shiuan, Taiwan’s former prime minister, pointed out to me: when Taiwan moved up the value chain from low-end, labor-intensive manufacturing to higher, value-added work, its factories moved to China or Vietnam. It lost them. In China, low-end manufacturing moves from coastal China to the less developed Western part of the country and becomes an engine for development there. In Taiwan, factories go up and out. In China, they go East to West.
“China knows it has problems,” said Liu. “But this is the first time it has a chance to actually solve them.” Taiwanese entrepreneurs now have more than 70,000 factories in China. They know the place. So I asked several Taiwanese businessmen whether they would “short” China. They vigorously shook their heads no as if I’d asked if they’d go one on one with LeBron James.
But, hey, some people said the same about Enron. Still, I’d rather bet against the euro. Shorting China today? Well, good luck with that, Mr. Chanos. Let us know how it works out for you.