Like muppets heckling from afar, or how to call China wrong

The easiest place to be critical is from afar and it will always be the realm of the pusillanimous. Come to find out, it is also a very dangerous place to hold court if you’re a China short seller or – God forbid – investors backing those calls.

In yet another example where the steak hasn’t matched the sizzle, we had earlier this year a big, bold and hairy call from afar by the Dallas-based offices of Mr. Kyle Bass. China, he professed, was just "months away" from reaching an untenable debt threshold which would result in a 30% to 40% decline in the Chinese currency, the Renminbi (RMB). This call and the big numbers were equally matched by a great deal of fanfare and headlines. As we head closer to the end of the year, the actual outcome is nothing more than another China short call falling well wide of the mark.  

Oh, I am quite certain that we will once again hear the phase “it’s just a matter of time”. It has, after all, been the go to rationale applied to all previous missed calls. And yet I find myself, prone to offering unsolicited advice as I am, suggesting rather strongly to Mr. Bass that before doubling down on any RMB short trade he ring up his neighbor Mark Hart for a bit of friendly, hard earned perspective.

Calls against China are nothing new and they do certainly grab headlines. Just this past week we had the Bank for International Settlements stating that China was operating with debt three times the level deemed as putting an economy at risk. This was then followed by Fitch Rating stating that NPLs in China were 10 times higher than official estimates. Finally, we had former IMF economist Ken Rogoff warn that not only was the Chinese economy at a real risk of a hard landing but that such an event would take the world economy down with it.

The road to China infamy through calamitous calls is littered with more dead bodies than I can count.

All of the concerns expressed this past week have been making the rounds for the better part of a decade. But for right now I want to return to all of the emblazoned headlines in which real money has been put on the line. You see, what no one seems to be asking is whether any of the negative hyperbole over China is being matched with actual outperforming returns. Sure, the delivered analysis and negative China narrative will be (literally) pitch perfect when raising funds from investors, but have these China shorts actually made money for those investors? I have my doubts. 

In aggregate there is no way of knowing. That I can admit and in truth what actually constitutes a “China short” even seems to be open to debate. That being said, we can take a keyhole approach to the issue and specifically measure recent successes, or lack thereof.

Several months back China perma-bear Jim Chanos came out (again, big headlines) saying that China is the “gift that keeps on giving to the short side”. For the first time though, we can finally measure the gift for gab against actual investment performance. At the same time Mr. Chanos made this sound bite proclamation he also publicly called out Alibaba even going so far as to compare the company’s accounting standards to that of Enron - the foundation of which the House of Chanos was built upon (granted, some 15 years ago). That short call was made when Alibaba was trading in the mid to high $70s. Today, the stock is trading north of $100. As the saying goes….that’s gonna leave a mark.  

Now, a single (even quantifiable) data point doesn’t make a trend. When measured alongside all of the errant macro calls though,the evidence should – at the very least – give room for pause to anyone thinking about shorting China. By no means am I advocating going long on China, although far more people have made money doing just that over the past decade. I’m simply recommending that all negative headlines centered on China be taken with an ice-berg sized grain of salt.

Allow me to conclude with one final point; the likes of Mr. Bass and Mr. Chanos (and numerous others) have made it a point to state that they’ve never been to China and they wear that proclamation like a badge of honor. Ignoring the fact that such a statement flies in the face of fiduciary responsibilities, I cannot for the life of me understand how anyone would make an investment (long or short) on the world’s second largest economy without having ever personally examined that market.

Boys, time to book that plane ticket. You’ve no idea what you’re missing – both literally and figuratively – and it’s now costing you.