Muddy Waters’ Block Says Chinese Consumer Theme Is ‘Overblown’

Carson Block, the short seller who runs research firm Muddy Waters LLC, said U.S. investors are too eager to put their money into China where consumer demand is overstated.

“The idea of the Chinese consumer has always been somewhat overblown,” Block said yesterday on a panel at a Bloomberg Link Conference in New York. “Part of the reason for that is that you have luxury-goods manufacturers such as Louis Vuitton that report outstanding sales in China.” Muddy Waters research alleging Sino-Forest Corp. had overstated timber holdings prompted a 67 percent slump in the company’s shares. Sino-Forest has denied the allegations.

Businesses are turning to China to bolster sales as rising unemployment and government indebtedness damp confidence in developed nations. Foreign direct investment in China climbed 11.1 percent in August from a year earlier, a government report showed yesterday, as the nation’s growth encourages companies from Volkswagen AG to Caterpillar Inc. to expand.

Inflows of overseas cash are inhibiting Premier Wen Jiabao’s campaign to control inflation, while higher interest rates and tighter lending limits are undermining attempts to make consumers a bigger driver of the world’s second-largest economy. Chinese government data last week showed retail sales growth slowed to 17 percent in August, less than the average of the past five years.

Shiny Buildings

Analysts at Capital Economics, a London-based research group, estimate that private consumption in China may have fallen to 34 percent of gross domestic product last year, the lowest level since the country began opening its economy to market mechanisms more than three decades ago. Just 10 years ago, the share was 46 percent, Capital Economics calculates.

“We see the tall, shiny buildings in Shanghai or Beijing and we meet with the Chinese who have graduated from Harvard, who have somewhat been inculcated with western values, and we mistakenly extrapolate this to the large portion of the economy,” Block said.

Sales of luxury goods in the world’s most populous nation are projected to surge eightfold to 74 billion euros ($103 billion) in the 10 years to 2020, according to Credit Agricole SA’s CLSA Asia Pacific Markets unit.

Asia accounted for 28 percent of LVMH Moet Hennessy Louis Vuitton SA’s revenue in the six months through June, according to data compiled by Bloomberg. The Paris-based maker of Celine handbags and TAG Heuer watches reported a 25 percent increase in first-half profit on July 26.

Shares of Hong Kong- and Mississauga, Ontario-based Sino-Forest have slumped 67 percent in Toronto since Muddy Waters issued research questioning the company’s timber holdings on June 2. Canada’s main securities watchdog said some Sino-Forest directors may have engaged in acts “related to its securities” that they “knew or should have known” perpetuated a fraud.

Block had a short position on Sino-Forest shares, as disclosed in the report. Short selling is the sale of borrowed shares with the hope of profiting when they fall.