China Cracks
As you already know, we have been very negative about China, it’s impact on iron ore and coal and ultimately Australia, for several years. We also avoid many, if not all Chinese companies listed in Australia or the United States because auditors can not give unqualified opinions about the numbers because China’s deems them a state secret. And finally we have often questioned the accuracy of China’s economic data, particularly GDP – which remarkably is released at the end of a quarter before the US releases their number.
Our belief is that China is growing slower than the numbers reveal, that the banking system is in crisis and that the market will see the stock and property market collapses in China as evidence they are not omniscient and omnipotent investors.
Perhaps the investment world’s most respected China critic however is Jim Chanos, who runs the world’s largest short-selling fund. This link will take you to an excellent recent interview he gave to US radio station NPR.
In the interview Chanos suggests the real indicators of advancement towards a worse-case-scenario are debt levels, currency devaluation and capital outflows.
Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
David Chen
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If smart fund managers like Roger are pessimistic on China, this can be a great contrarian signal to step in and buy China now on cheap valuations. H share below book value. GDP 7% growth, great new leader. China will defy all groom predictions and become successful again.
Five years time looking back, this is the bottom valuation for China.
John Penn
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Interesting! Are you guys shorting any mining or mining services companies as a matter of interest?
Roger Montgomery
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Some coal ‘producers’ in the US.
John E
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Longer term China will recover and prosper. They are still one of the economic powerhouses of the world.
Value investors should be starting to rejoice as opportunities to buy great businesses at great prices start appearing.
But yes, you feel this slowdown is in its infancy and there will be more downward asset revaluations to come.
The only thing is that governments no longer like to allow the cleansing process to occur, i.e. recessions cause they think it’s bad for their popularity.
So continuing easy money will be the order of the day. This includes bailouts. Zombie companies and institutions are being allowed to survive which really penalises those companies in the same sector who have done the right thing and managed their businesses well as there is more competition than there should be.
China will pull out all stops to keep the peace. Nothing different from what the western world has done over the last 10yrs.
Doug Sumner
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I recall an enthusiastic investment banker from Europe speaking at a long ago conference back in the early 80’s.
I remember his main thesis was that the Japanese didn’t invest by our rules and didn’t care or need Western ways of investment analysis and valuation. In short, he proclaimed, they really were different, they were destined to far outstrip the economies of the West and we simply didn’t ‘get it.’
I guess we did….
In the end it seems that growth assets funded through excessive debt and the seemingly inevitable accompanying hubris that this time it’s different teaches a lesson that each generation has to learn (usually twice).
Roger Montgomery
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Nicely put Doug
John
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I can never understand how China as one of the largest creditor countries in the world could go broke as both Jim Chanos and you seem to agree upon. But should China fail, wouldn’t the value of most equity investments be destroyed too. So where to invest if you believe China (and the world) is headed for financial trouble?
Roger Montgomery
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Just as a wealthy man might gamble and speculate and fritter his wealth away, so a nation can too. I don’t recall however anyone here at Montgomery saying China will go broke. You have made that extrapolation.
Colin Jones
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Not an easy analysis. China works in a very different way with a different set of core values. Remember Jim Chanos was wrong about Macquarie Bank around time of GFC.
Roger Montgomery
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Once China allowed some capitalism, it ceased being very different