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China Is the New Dot-Com Bubble: Gordon Chang

Fin - Breakout - US

"In the past it was tulips, then we had dot-coms, now it's China. Everyone wants a piece of it."

These are the rather concerning words of Gordon Chang, author of The Coming Collapse of China. Yes, the man is literally talking his book. That doesn't make him wrong. Hear him out as we all try to piece together the riddle that is China's grand foray into capitalism.

Before everyone breaks into their familiar "China is a fraud" vs. "China is the future" camps, let's reconcile the two ideas by injecting the very traditionally Chinese notion of time into the equation. Chang did so early in our interview. "You can have growth in China over a very long term, but that doesn't mean you're going to do well in the next one to two years," he says. Jim Rogers was talking about the long term and trading it via ag plays and precious metals. Gordon Chang is talking about what he says is a massive bubble in Chinese companies. We can all get along.

Chang says many of the assumptions about Chinese growth are simply incorrect. For one thing, what was previously thought to be virtually endless growth driven by an insatiable demand is a facade. "Domestic consumption in the Chinese economy has been dropping," he says. "[Growth] is going up in absolute terms, but not as fast as the retail sales numbers suggest." The growth numbers on Chinese consumption include unsold inventory, making them "not indicative of what's happening."

Chang's observation on that front connects the dots between the disconnect of China's stated growth of some 9 percent and the roughly 2 percent growth of Chinese imports of copper and other raw materials. Chang also notes that Chinese inflation is almost certainly larger that the Chinese admit. While China itself has announced concerns about inflation of late, the broad money supply (M2) has risen by some 20 percent. Indeed, in 2010, Chinese M2 had increased 26 percent year over year.

The dangers of investing in China, even for Big Money, have been amply illustrated by the de-listing of Longtop Financial Technologies (LFT), with which Goldman Sachs (GS) and respected accounting firm Deloitte were involved. Also to be considered were the more recent travails of John Paulson and Sino-Forest. Longtop is more or less gone and Sino-Forest, listed on the Toronto stock exchange, has fallen 90 percent in less than one month.

"We're seeing a lot of smart people doing some very stupid things at this moment," says Chang, rather succinctly summing up the two debacles.

To me the situation in China resembles investors' recent experiences in Russia as much as it does tulips or 'net stocks. The Russian Stock Exchange quintupled from the start of '05 to May 2008 and took it all back in a spectacular 75 percent plunge over the last seven months of that year, when accounting scandals and government malfeasance reared their ugly heads.

When asked to compare China and Russia, Chang notes that "up to now, China has been very different than Russia in the terms of the way the Russians rip people off." That said, a new regime is taking hold of China. In Gordon Chang's estimation, this will lead to a tighter grip over the Chinese economy and a move in the direction of Russia under Putin.

For those keeping track at home, the market direction in Putin's Russia was sharply higher, then down much lower than anyone thought possible.

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