shaunreinShaun Rein by Fantake via Flickr

Famous economists take very different positions on the questions whether China’s economy is a bubble or not. In Forbes Shaun Rein explains James Chanos China has no bubble. Making some bucks on telling the world about China’s demise, economically or otherwise, has been part of China’s upsurge. In the year 2000 the best-selling author Gordon Chang predicted in his book “The Upcoming Collapse of China” a fast collapse.
Major flaw of Chang’s and other doomsday scenario’s: they were wrong. James Chanos now jumps on this lucrative bandwagon and Shaun Rein is rightfully setting him straight.
Shaun Rein:

Chanos called it right on Enron and Tyco ( TYC – news -people ) before they collapsed. He is no lightweight observer of the economic scene. However, he is wrong about China. For once I agree with the famed investor Jim Rogers, who cofounded the Quantum Fund with George Soros. He says China is not in a bubble and adds that he finds “it interesting that people who couldn’t spell China 10 years ago are now experts on China.”

Rein explains that the rise of real estate is China is different from the US and Dubai, because owners have to pay a big chunk of their mortgage upfront as downpayment.

Also, mortgages are not being spliced up and packaged and securitized by the likes of Citigroup ( C – news – people ) and Bank of America ( BAC – news – people ). Instead mortgages are held by the original lenders, the way they were in the U.S. before financial innovation and lack of regulation broke down the old rules.

Income in China has been underreported, making the real estate industry dramatically different, argues Rein:
If anything, incomes are grossly underreported in China. A simple look at how accounting works will show why. Whereas in the U.S. individuals must report their income to the Internal Revenue Service every year, in China all individual tax is reported and paid for by companies, except for that of high earners. Many Chinese companies limit the tax they pay by reporting low salaries and then paying their employees higher amounts while accounting for the difference as business expenses like phone bills. The employees are happy because they make every bit as much as they were promised, and the companies are pleased to lower their tax exposure.

Also, many companies pay for housing and cars for their employees, a holdover from the old system of state-run businesses. Most Western economists don’t count those expenses as income, but they should. Deceptive accounting of income is so widespread that the government has announced plans to tax some business expenses in state-run enterprises–the kinds of expenses that let executives pay taxes on earnings of $300 a month while living in multimillion-dollar homes and driving Mercedes.

More in Forbes.

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Shaun Rein is a speaker at the China Speakers Bureau. Do you want him to share his insights at your conference? Do get in touch.

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