Chinese Economy Strong? Depends Who You Ask

It’s a week of dueling predictions for the Chinese economy—in a debate that pits the International Monetary Fund against one of the most successful investors in the hedge fund sector.

China Trade
Reed Saxon
China Trade

On Thursday, the IMF publicly released the results of its so-called “Article IV consultation with China.” The report is conducted every year, but 2010 was the first year since 2006 that the results had been made public. The Chinese government blocked publication in each of the previous years.

The 2010 report, though, had a bullish take on the Chinese economy, projecting 10.5 percent growth in 2010, an increase in domestic demand of 11.5 percent, and a decline in unemployment from 4.3 percent to 4.1 percent.

The IMF executive directors commended what they called China’s “proactive and decisive policy response” to the global economic crisis. “Growth is expected to continue to be robust, while the inflation outlook appears benign,” the IMF wrote.

In fact, the main problem that the IMF saw was that Chinese growth could be so robust that international trade imbalances could worsen.

Contrast that take with the view of Jim Chanos, founder of the hedge fund Kynikos Associates, who has been predicting for much of the year that China’s economy is overheated and destined for some sort of setback. Chanos is most famous for being one of the earliest investors to discover Enron's dubious accounting.

Chanos, a source familiar with the situation said, has briefed officials at the highest levels of the U.S. defense establishment on his view of the Chinese economy’s troubles. He argues that China has a “credit-driven property bubble” and points to a slew of statistical and anecdotal data to back that up.

On the statistical side, Chanos says that Chinese economic stimulus was a whopping 14 percent of its GDP, versus a relatively small 6 percent for the U.S. And he points to commercial office vacancy rates of 18 percent in Beijing and 14 percent in Shanghai.

Anecdotally, Chanos points to a nearly entirely empty newly constructed city called New Ordos in Inner Mongolia in which much of the property was purchased by speculators, and sits empty. And he cites a popular television soap opera in China called “Dwelling Narrowness,” which centers on the struggles it’ characters face finding affordable housing in a big Chinese city.

All of that, Chanos argues, points to a society that’s dangerously close to an economic retrenchment.

Investors can be forgiven for being confused. But one thing is clear – whichever side prevails in the China bull/bear debate will have enormous repercussions in China, and in the United States.