First of Several Parts: Why Investing or Dealing with China Won’t be Such a Good Idea in the Near Future

Contrarian investors get little love these days. They are the modern-day Cassandras of the business world who go against the popular trend, often blamed (unfairly) for market spikes and massive sell-offs.  Yet, professional naysayers from George Soros to Bill Gross of PIMCO Funds have routinely made predictions about the state of a country’s economy or currency – and on occasion, have nailed it down. To date, the most spectacular bet done in all of history was George Soros’ $10 billion speculation against the pound sterling, which almost effectively ruined the Bank of England, while making him all the more rich and famous (or notorious, if you’re a hater).

Just as important but not as well-known is James Chanos’ short-sale of the late behemoth Enron, as it came to a crashing end in 2001. Recently, the founder and president of hedge fund Kynikos & Associates made yet another bold prediction: That China the upcoming economic giant, would see its own economic bubble burst after it implodes from a critical mass of excessive cre- dit lending.  In a New York Times article dated Jan. 8, 2010, Mr. Chanos was reported to be looking for a way to profit from an impending collapse of China’s economy, whenever that may be. That won’t be easy to accomplish. China’s closed-society scrutiny of every scrap of information flowing  inhibits any kind of speculator action.

Governments dream about such tight controls but could never pull off such stunts because of constitutional restrictions. China’s case is a fulfillment to the extreme. So from a businessman’s point of view, what’s the problem? Nothing… unless a lot of that information happens to be false, even under so-called “regulation.”  A hallmark of a properly-functioning government is accountability and transparency,which the Chinese have rarely exercised, except as a matter of convenience. In the meantime, if an illegal practice in trade yields mighty profits for the merchant and his sponsor country, it has been standard practice by government officials (especially in Asia) to wink after generous kickbacks and favors.

You can bet money that even with corruption kept under control, such lax standards will eventually come back to haunt China in the form of subpar quality standards for products and services and poor labor practices. This would eventually lead to lawsuits and/or shortened contracts, and ultimately little or no desire from foreigners to do business. Not all dealings with Chi- nese subcontractors will be bad, but the tendency for regulators on that side of the Pacific to overlook ethically questionable practices will encourage unscrupulous businesses to act with even more impunity. Only when they become a major embarrassment will true regulatory action (often belated) will happen.  One bad egg might even merit a hanging.

What about several thousands of corrupt Chinese businessmen who are complicit in a major financial collapse?  If exposed, assume that they meet the same fate. That’s not exactly a figure you could sweep under the carpet, though. Nor will their elimination solve the fundamental problems they’ve created, long after they’ve been purged and buried.

Copyright Anabasius 2010


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