China Boom, or China Bust?

Is the great hope of the investment world little more than hype? We like to visit the “China boom or China bust?” debate every once in a while, and the argument today is pretty one-sided… the “busts” have it.

“Bubbles are best identified by credit excesses, not valuation excesses,” famous short seller Jim Chanos begins, “and there’s no bigger credit excess than in China.” He’s clearly made up his mind, calling China “Dubai times 1,000.” Given his history with Enron, then Tyco, then homebuilders, then banks and then overhyped infrastructure bets last year — we pay attention when this guy pounds the table.

Chinese investors will soon be permitted to trade index futures — on the margin, no less! (Heh, talk about credit excess.) The China Securities Regulatory Commission announced this morning the legalization of stock index futures, margin trading (where traders need only a 10% down payment to take a position) and short selling.

Of course, these could all be great ways to tame Chinese market volatility and allow prudent investors to hedge their bets. But as we’ve learned good and hard here in the U.S., nothing takes a bubble to the next level better than leverage and derivatives. The measures are expected to go into effect by March.

China’s central bank raised its interest rates yesterday for the first time in five months… another sign that credit is getting out of hand there.

“They’re down to a 10-day supply of coal in China,” Byron King reports, with a far more urgent matter than index futures and interest rates. According to the Shanghai Daily, ‘The State Grid Corp. of China, which supplies power to more than 1 billion people [not a typo], has warned that a national electricity shortage may worsen… Thermal-coal stockpiles were falling amid the delay in deliveries caused by bad weather… Some cities had begun temporarily switching off power supplies to limit consumption.’

“Switching off power supplies is certainly a way to ‘limit consumption,’” Byron quips. “China’s energy problem is something of a triple whammy. China relies on coal for 80% of its electricity generation. Yet China can’t mine enough domestic coal. Like coal mining nations everywhere, China’s shallow seams are mostly mined out and the shafts are deeper and more dangerous (killing over 4,000 Chinese coal miners per year). So China imports significant amounts of coal.

“But Chinese coal imports require extensive transport and logistical systems to get the coal from the port to the power plant. Problem is, the infrastructure isn’t built out to the scale that the Chinese need.

“Now add on top of this the problem of bad weather in China. And it’s not just a one-off problem this year. Things like this seem to happen over and over. Last year, for example, China called out its army to shovel snow off the roads and rail beds so that the coal trains could deliver the goods. Wow, talk about outrunning the headlights.

“All this means that coal prices should firm up and rise this year. Carbon intensive or no, coal is there, and much of the world is built to use coal-fired power. The China news also means that whenever the State Grid shuts off the power, factory managers are throwing a switch and firing up their backdoor diesel generators. This means increased oil use in the Middle Kingdom, surely a strong support for rising oil prices.”

The Daily Reckoning