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Opinion

Long-term govt bonds a 'bad bet'

By Tal Barak Harif (China Daily)
Updated: 2010-05-06 10:47

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NEW YORK - Long-term government bonds are a bad bet anywhere because nations are issuing debt to bolster their currencies, said James Chanos, hedge fund manager and founder of Kynikos Associates Ltd.

James Chanos, hedge fund manager of Kynikos Associates Ltd. [DANIEL ACKER / BLOOMBERG]

"Whether it's China, or the European Union or even the United States - if there's anything the central bankers and authorities have shown you is that we're worried about currency issues down the road so we're going to continue to issue debt to avoid any payment deflation," Chanos said at the Bloomberg Markets Hedge Fund Summit. "Long-term government bonds anywhere would probably be a bad bet right now."

Treasuries climbed on Tuesday, pushing 30-year bond yields to the lowest level in more than four months, as concern that a rescue plan for Greece hasn't contained Europe's debt crisis boosted demand for the safest assets. The US equities tumbled the most since February and European stocks erased their 2010 gain, while the euro slid to a one-year low. Chanos also said speculation in Chinese real estate has propped up the market.

"Supply is being created to meet that demand," Chanos said. "People that are buying houses are buying five or six at the time and the rest are empty - they are trading them."

China will need "gumption" to stick to lending curbs imposed over the past several weeks, he said. Last month, Chanos said China is on a "treadmill to hell" because it's hooked on property development for driving growth.

Stocks drop

China's stocks fell on Tuesday, sending the benchmark index to the lowest in seven months, on concern ordering banks to set aside more reserves won't be enough to avert asset bubbles in the world's third-largest economy.

Industrial & Commercial Bank of China Ltd and Bank of China Ltd retreated at least 1.1 percent after Deutsche Bank AG said the reserve ratio increase removes 300 billion yuan ($44 billion) from the financial system.

"I guarantee there will be write-offs if not this summer, by the fall," Morgan Stanley Asia Ltd Chairman Stephen S. Roach said. "The banks will have to take a hit."

A two-year stimulus plan announced in 2008 and unprecedented bank lending last year helped the nation to post 11.9 percent growth in the first quarter, the fastest pace in almost three years, as exports and profits rebounded.

Policymakers on Sunday ordered banks to hold more of their assets as reserves for the third time this year, as the government seeks to prevent overheating in the world's third- largest economy.

"This is not the end of the world," Roach said at the summit. "The China growth story is not a fantasy story. It is a developing economy. They drive an awful lot of growth through the supply side."

Bloomberg News