Saturday, January 9, 2010

Chanos Is Shorting China via Commodities

Ed Liston writes:
Contrarian investor Jim Chanos, known for his short selling prowess, has now made it known that he is betting against one of the biggest stars of today: China Inc...

Chanos warns that China’s economy is hyperstimulated by credit excess and headed for a spectacular crash. He even suspects that the growth rate of 8% is cooked. Chanos doesn’t seem to be bothered by the fact that he is betting against the collective wisdom of the likes of Warren Buffet, George Soros, and Wilbur Ross, among others.

Chanos is focusing on infrastructure-related commodities like copper and iron ore in his bet against China. A point to be noted is that he excludes gold from the list as it not an infrastructure commodity. According to him, the main risk is that China will overproduce and end up with a surplus that it cannot sell.
Chanos is very right here. However, timing is the key. These bubbles can carry on for years. One sign,though, that we may be near the end is that China has started to raise interest rates. It will take more than one rate hike, but if they are headed up, the potential is there to eventually cut off the flood of easy money in China.

Shorting China via commodities is also an interesting play, since downward commodity pressures from the US will add to the downward spiral.

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