Bloomberg News reports that Warren Buffett is now happy to see the Chinese stock market drop since he's sold his stake in PetroChina (NYSE: PTR). At least that's my interpretation of his comments today that the Chinese stock market -- after its CSI 300 Index soared 174% in 2007 -- is poised to plunge.

Buffett is canny about not tipping his investment hand when there's money to be made. And if his comments could motivate investors to sell their Chinese stocks, he would be in a strong position to profit from such a plunge by selling short that CSI 300 Index.

On the other hand, the Chinese government has an enormous interest in keeping such a plunge from happening. That's because, as I posted this May, many of the investors in the Chinese market have borrowed huge sums to gamble in its market, often using numerical superstition as the basis for their investment bets. The Chinese government would love to prevent the political instability that would follow a market crash -- and the rage of newly bankrupt stock market gamblers.

I think in the face-off between economic rationality -- as embodied by Buffett -- and the desire to control its potentially fractious citizenry, the Chinese government will win. So I hope for Buffett's sake that he has not shorted the Chinese market, even though it's probably grossly overvalued.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in PetroChina securities.

Is Buffett short China? originally appeared on BloggingStocks on Wed, 24 Oct 2007 11:38:00 EST. Please see our terms for use of feeds.