Delivering Alpha 2011

Not All Investors Think China Is in a Bubble

The Chinese economy can well absorb the rapid growth in its housing industry, according to one investor who disagrees with widely followed hedge fund manager Jim Chanos' position that a bubble is forming there.

James S. Chanos
Scott J. Ferrell | Congressional Quarterly | Getty Images

Chanos' call that he is taking short positions—or moves against China—has gathered widespread attention.

He believes the surge in "ghost cities" is indicative that the real estate bubble is intensifying and could explode in much the same way it did in the US.

But Dan Arbess, partner at Perella Weinberg, disagrees and in fact believes Chanos, president of Kynikos Associates, has it exactly wrong about China.

"Shorting China, in generalities, is basically shorting the march of history," Arbess said during a debate at the Delivering Alpha conference. "The single most important development in our generation is the devolution of communism and the entry into the global consumer economy of the 3.5 billion people who live in former communist economies. The rise of the consumer...ultimately is a result of the fact that China has maintained control over their economy."

Worries over China center on belief that policy makers will rein in growthto slow inflation .

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At the same time, the Chanos "ghost city" theory—which revolves around newly built but  unoccupied communities—has sparked fear that the huge role that China has played in gross domestic product growth will end.

"The short answer is I don't believe China is a bubble," Arbess said. "I think there are misallocations of capital. But those misallocations of capital can be managed by various levers of policy that Chinese policy makers have to keep the urbanization, industrialization of their economy on track."

Chanos, though, defended his call, saying the centrally planned economy can backfire as local governments are pressed to continue growth at full speed even though the housing market will not be able to sustain the push.

Delivering Alpha: China, Bubble or Bonanza?

"These buildings may not be standing in five or 10 years," he said. "You're talking about an economic system where profits are not maximized for the largest economic actors. You're talking about a history of horrible lending. You talking about a system in which the export-driven model hasn't been changed by Western demand."

From a strategic standpoint, Chanos said he is short Chinese banks and long on high-yield debt. Arbess said he would not buy Chinese debt and is long on top-tier builders and global multinationals with strong growth trends in China.

"There are inefficiencies that you would expect with rapidly growing economies," Arbess said. "But these inefficiencies are blips."