The discussion of whether or not the Chinese economy is a bubble destined to collapse, or if the recent rash of media over empty cities and spiraling food costs are merely sensationalistic hype masking an unstoppable growth story, has become a favourite Wall Street parlor game over the past year.
May trade data from China released earlier this month registered stronger growth in imports than consensus forecasts, suggesting that demand in the Middle Kingdom is remaining resilient despite the steady rounds of tightening that the People’s Bank of China policy makers began in the fourth quarter of last year.
With interest rate and reserve ratio increases still failing to tame rising prices completely, some economists anticipate that currency appreciation against the dollar peg is remains a possibility. Simply put, the longer view of the situation facing Beijing is still very much a matter of debate.
One strong voice in this debate is Vikram Mansharamani, a Managing Director at Boston-based SDK Capital and a lecturer at Yale where he teaches a seminar on economic boom and bust cycles that served as the basis for his book ‘BOOMBUSTOLOGY: Spotting Financial Bubbles Before They Burst‘ that was published earlier this year.
Mansharamani, who holds a PhD and two master’s degrees from MIT, helps oversee a long/short global equity portfolio. “I skin the cat thematically – what I look for structural long term trends on which I can bank for longs, and on the short side I look for things that fit my framework of bubbly conditions.”
One example Mansharamani gives as a potential developing bubble is base metals. “The steel industry in China boomed from 5 per cent of global steel production in the late 70s to almost 50 per cent today; on the back of that surge was a voracious appetite for iron ore” he says. “Anticipating that Chinese growth will continue and extrapolating on past trends, the iron ore industry is now planning expansions equating to over 100 per cent capacity growth in the next 10 years. Well, hold on a moment: if China continues to grow at past rates, China becomes more than 90 per cent of the entire global steel market – which is unlikely, and so it seems likely that the iron ore capacity may be rising just as slowing capital investments in China cools demand.”A native of western New Jersey, Mansharamani had an unlikely path to high finance. The son of an auto service technician and a dietician, he won a scholarship funded by Jack Bogle to attend Blair Academy, a private, co-ed boarding school in north-western New Jersey. Starting at the age of sixteen, Mansharamani began an unusual (for high school students) series of summers interning on the institutional equity sales and trading desk at Bear Stearns, where he reported to Mitch Jennings, a Blair alumnus, and Ricky Greenfield.
After high school (and three summers at Bear), he entered Yale where he spent his summers very differently – working at the American Enterprise institute where he assisted the legendary Sinologist and diplomat James Lilley. The experience at AEI led to fieldwork in Asia (including a summer at the US Embassy in Beijing) that ultimately sealed his fate as a China focused investor.
Mansharamani recently spoke to InstitionalInvestor.com contributing editor Andrew Barber about the factors he considers when evaluating boom and bust cycles and how these stack up for China.