Shilling: Get Out of China ASAP

Gary Shilling, the contrarian investment advisor who called the Internet collapse, has some new advice for you — get out of China, and fast.

"If you still own Chinese shares, sell. If you are daring, short-sell an exchange-traded fund of Chinese shares,” he writes in Forbes.

China prohibits short selling, but many companies are dual-listed on the Hong Kong exchange and can be shorted there, he advises, as can exchange-traded funds holding Chinese shares.

Shilling sees China taking the brunt of the U.S. slowdown that is still unfolding over declines in home values. Europe and Japan will follow the U.S. downward as their home prices collapse, too.

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Consumers will give up, and that will hurt export economies around the world, especially China, he contends. China’s economy is heavily export-oriented (38 percent of its gross domestic product).

"Without export growth and the foreign investment it brings, China's economy is in trouble,” says Shilling.

Part of the problem is income. Just 8 percent of Chinese earn enough to affect the domestic economy positively and, even so, Chinese save nearly a third of their pay.

Since the Chinese don’t (or can’t) spend, and state banks pay paltry, below-inflation rates, the Chinese themselves have been driving up domestic stocks. (They cannot now invest abroad at all.)

"Despite the recent downturn, the Shanghai Composite Index was up 435 percent from the beginning of 2006 to the peak last October,” Shilling writes.

Meanwhile, exports have slowed and costs are piling up. The government is accelerating its push to quell inflation by slowing money supply and raising bank reserve requirements. Food costs shot up 23 percent in February alone.

Capital spending will slow as the banks pull back, and real estate will decline. The government is likely to spend some of its $1.68 trillion in reserves to cushion the blow, but there’s only so much social spending that can take place that will matter.

Things could get ugly, Shilling warns. Remember, he writes, it was inflation that in part sparked the Tiananmen Square uprising in 1989.

"Further declines in Chinese stocks will rile the 100 million Chinese who have invested in equities with the government's encouragement, and since most public companies are state-owned, those investors may blame the state for their price collapses,” he writes.

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