market folly

Continuing our coverage of the Delivering Alpha conference today, we turn to the panel on China: Bubble or Bonanza? In the bull corner sits Perella Weinberg Partners' Dan Arbess, who runs the highly successful Xerion Fund. Opposite him in the bear corner is renowned short-seller, Kynikos Associates' Jim Chanos.

While the respective fund managers disagree on whether to be bullish or bearish on China, they do agree that there are 3 key issues in Chinese investing:

1. Real estate
2. Financial system
3. Dependency on fixed assets

Dan Arbess has long said to play the 'shake hands with China' trade by buying multinationals that are seeing high revenue growth from China. This is something we've touched on in a past Xerion Fund letter and you can also read up on Xerion's 2011 investment strategy.

Arbess says that, "to short China in general is to short the march of history. The single most important development of our lives is the devolution of communism and the entry into the global consumer economy of the 3.5 billion people." He clearly feels there's a monumental shift taking place in the global economy.

Chanos, on the other hand, says that GDP in China has declined over the last few years and net exports have fallen too. He feels that the country is structurally imbalanced.

In the past, Jim Chanos has fixated on China's 'ghost towns' as reasons to short China property. Chanos today said that, "these buildings may not be standing in five or 10 years. You're talking about an economic system where profits are not maximized for the largest economic actors. You're talking about a history of horrible lending. You're talking about a system in which the export-driven model hasn't been changed by Western demand."

Arbess counters that Chinese ghost cities are a red herring. He argues that everyday people are moving to the cities and plugging the supply of developments. While he admits that there is speculation in the property market, policy makers are dealing with it by clamping down credit and curtailing the ownership of multiple homes.

The Xerion Fund manager went on to say that, "I think there are misallocations of capital. But those misallocations of capital can be managed by various levers of policy that Chinese policy makers have to keep the urbanization, industrialization of their economy on track."

Earlier today, we highlighted how Chanos is long corruption and short property in China. He likes being long the Macau casinos but short property developers and short some banks (he noted he is not short US banks).

On Ackman's Long Hong Kong Dollar Trade

Both men came on after the speech from Pershing Square's Bill Ackman where he unveiled his new long Hong Kong dollar trade. Given the China bull/bear debate that Arbess and Chanos had, it was also interesting to get their takes on Ackman's latest investment.

Arbess said Ackman's play was plausible while Chanos said he would prefer to be long the Singapore dollar if he was choosing an Asian currency. Earlier we detailed how Tiger Management's Julian Robertson likes the Singapore dollar as well.