BUSINESS CLASS: Chinese checkers

Having spun all the gold they can from the troubles in the GFC-ridden western markets, it seems a few industrious, bear-market-minded types are heading east to see if they can't squeeze something out of China's bubbly, bubbly economy.

An article published in The Economist last week said that "a pair of widely circulated reports on how to hedge a downturn, written in April by Goldman Sachs (stamped 'highly confidential') and Morgan Stanley respectively, spell out some of the alternatives" for China watchers. "In each, the underlying idea is similar: if shorting China is impossible, find things tied to China."

According to Morgan Stanley, the canny investor should start with all things Australian and South Korean – "the two countries with the strongest connections to China after adjusting for re-exports", says The Economist.

"Both places offer numerous financial products, such as exchange-traded funds linked to indices, that can be shorted," says the magazine, displaying a graph that charts the strikingly similar paths of the Australian dollar and the Shanghai A-share index. "The report also cites three commodities that are particularly tied to China's growth: copper, above all; then soyabeans; and oil."

Goldman, among other things, suggests "a combined option structured to benefit from a decline in the Australian dollar, Goldman's own commodities index and the Hang Seng China Enterprise Index, comprising Chinese companies listed on the Hong Kong stock exchange."

But before you run off and put it all on China's economy going pear-shaped, China Financial Markets blogger Michael Pettis has some words of warning. "We should be very cautious about how we interpret the meaning of the gyrations in Chinese stocks," says Pettis.

"A market driven almost exclusively by speculators, and with little to no participation by fundamental or value investors, is not a market that pays much attention to long-term growth prospects. It is driven largely by fads, technical factors, liquidity shifts, and government signalling."

In fact, he continues, "attempts by Beijing to hammer down real estate bubbles in the primary cities without addressing underlying liquidity expansion may simply push asset price bubbles elsewhere, and this could easily cause a surge in the Shanghai stock markets. But this should not then be interpreted as signalling a surge in the economy."

Meanwhile, there's some concern about the rather large sum of money China holds in foreign currency reserves – $US2.5 trillion, to be exact. And while most of this amount is thought to be in US dollars, China has increasing its holdings of other currencies, in the name of creating a more balanced, safe portfolio.

Which did, once, make sense, says Time magazine's Michael Schuman; "If you recall, not too long ago it was the greenback that was supposed to be knock knock knockin' on heaven's door.

"Now – surprise – we have a euro crisis. The dollar is looking groovy. The euro is doing its best impersonation of Wile E. Coyote plunging from a cliff with an anvil tied to his back. That has only complicated the lives of China's policymakers. And what they decide to do could have major repercussions for currency markets and the global economy. ...It also shows the dangerous position China has gotten itself into by amassing such a hoard of hard currency."

Phew.

Anyway, one investor we know won't be betting on Chinese bubbles any time soon is Mr Value Investor himself, Warren Buffett. After all, this is the man who this week told a FCIC hearing that he completely missed America's devastating real estate bubble.

Fact is, he's not mad about bubbles, full stop – not least of all because "they become delusional," as he told Commission bulldog Phil Angelides.

According to Forbes, "he also admitted that the 'internet bubble went further than [he] thought it would,' just as the price of [Nebraska] farmland had kept rising until it made investors look foolish."

Anyway, why would Buffett bother with such speculative plays when his regular old investment methods are working so well. According to GreenBiz.com's Marc Gunther, Berkshire's MidAmerican Energy Holdings unit bought a 10 per cent stake in the Chinese car, battery, electronics and solar power equipment manufacturer BYD, for about $US230 million in late 2008 which, today, is worth nearly $US2 billion. Now that's some handy Chinese value investing.

From Russia with billions

Last time we here at Business Class checked in on Mr Russian-billionaire17-times-over Mikhail Prokhorov, he took on the widow Safra and lost, thereby making what was described by Forbes' Karen Blankfeld as "the largest unwitting act of philanthropy". This week, everyone's favourite richest Russian is the subject of a New York Magazine feature that is, as with anything Prokhorov-related, fascinating.

More broadly, the article by Michael Idov is about a new breed of "Global Russians" that is making itself at home in New York – a group he says is characterised by "high-end striving mixed with Appalachian incest", and which more-or-less revolves around the NBA team-owning Prokhorov.

Says Idov: "The Global Russian influence is all over contemporary New York... In real estate, diamond mogul Lev Leviev... owns the lion's share of the old New York Times Building, the citadel-like Apthorp apartment complex, and the MetLife clock tower. Vassily Anisimov leased dormitories to NYU. Tamir Sapir, who ...made his first fortune in New York selling VCRs and other electronics (and also securing oil contracts from former Soviet diplomats), has $US2 billion in active development projects; his hard-partying son, Alex Sapir, and daughter, Zina Sapir-Rosen, have bankrolled a few of Donald Trump's latest ventures, including the Trump SoHo condo-hotel.

"Hotels seem to be especially appealing: The Gansevoort and 60 Thompson, as well as some of Andr Balazs's properties, are rumoured to have Russian backing... Edward Mermelstein, a Ukrainian-born real-estate lawyer specialising in massive deals for Eastern European clientele, handled about 120 Russian closings in New York over the last three years...

"Then, of course, there's airport mogul Valery Kogan, whose ultimately aborted attempt to build one of the largest mansions in Greenwich (complete with 26 toilets) fuelled the Connecticut enclave's gossip mill for years. As for the Russian contributions to Wall Street... There's an enormous number of people with Soviet math educations who work on the analytical side at places like Goldman Sachs. Some, like Ruvim Breydo, parlay their skills into hedge-fund fortunes. Others toil anonymously, and when we do hear about them – like computer programmer Sergey Aleynikov, who allegedly swiped Goldman's proprietary trading software – it's rarely good news."

And it goes on. But if you don't feel inclined to read about Prokhorov's penchant "for descending on Moscow's wildest nightclubs with ...a bald-headed, mildly freakish Russian film star ...[and] packs of coltish young things in tow," or his latest turn as glossy magazine editor, then you must, at least, watch this superb video of Prokhorov jet-skiing. You owe it to yourself.