The Tsinghua professor quoted in the original news report is exactly right in that regard. All of the previous rounds of physical infrastructure in China has paid off economically and socially.

There are two numbers which define China, and is far more important than GDP in any given year:

1) population: 1.3 billion and counting.
2) urbanization rate: 45% and climbing.

China’s urbanization rate will rise to 70% by 2035. If you do the math, that means 325 million Chinese currently living in rural villages will move to urban cities within the next 25 years.

And if you do the math again, that means:

- for every square foot of real estate currently in existence in China… it’ll be doubled over the next 25 years.

- it also means building 15 New York’s from scratch over the next 25 years.

The Tsinghua professor quoted in the original news report is exactly right in that regard. All of the previous rounds of physical infrastructure in China has paid off economically and socially.

There are two numbers which define China, and is far more important than GDP in any given year:

1) population: 1.3 billion and counting.
2) urbanization rate: 45% and climbing.

China’s urbanization rate will rise to 70% by 2035. If you do the math, that means 325 million Chinese currently living in rural villages will move to urban cities within the next 25 years.

And if you do the math again, that means:

- for every square foot of real estate currently in existence in China… it’ll be doubled over the next 25 years.

- it also means building 15 New York’s from scratch over the next 25 years.

I am saying that financial stresses will lead to some municipal bonds underperforming – perhaps causing the entire sector to underperform. I would expect there to be a dichotomy in performance based on this – with bonds from better positioned municipalities or attached to specific revenue streams to outperform. General obligation bonds are obviously of more dubious security than bonds funded by specific income streams.

As I am not an investment advisor backed by a large legal team, I am not going to point to specific bond issues. However, I am making a general call for investors not to rely on ratings alone in determining where to invest in this sector. Do your homework and you will be ok.

1. Not all states & municipalities are equally risky. I don't (& won't) hold any California munis, but Virginia (my state of residence) has some very strong constitutional controls on spending that help keep its bonds more secure.

2. The long-term liabilities of states and localities have been well known for years. Some states & cities are doing something about it; others are not (see above). Moreover, these liabilities may appear worse at the moment because of the recessionary downturn in revenues, but they're not.

3. Muni bond insurance hasn't meant anything for at least a couple of years, and doesn't mean anything now. It may have enabled some locales to borrow more cheaply, but it doesn't change their credit risk.

4. Ratings have been rightfully disgraced, at least in the absolute sense (i.e.–the certainty of repayment of a AAA bond to the “junk” status of B-rated or less bonds). NTL, I do believe the ratings, within some constraints, normally provide a sense of the RELATIVE risk among the muni bond buying opportunities. The key problem is that the ratings companies don't really change their calls (up or down) until well after the change in the risk quality of a muni bond is publicly known. (On the latter, the same applies to stock analysts' recommendations in mos cases.)

In short, I think one needs to think about the relative risk of municipal bonds at a little more discriminating basis than either you or Mr. Chanos has suggested. Not withstanding the likely adverse value effects that future inflation may bring, some muni bonds are more equal–and less risky–than others and those provide a reliable stream of income and re-payment of principal.