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Chanos Could Lose Big On China Bubble Bets
By Economic Forecasts & Opinions
Amid growing fears of a real estate bubble, Chinese officials moved to restrain bank lending and rein in inflation by raising its bank reserve requirements twice in one month. Global financial markets reacted with risk aversion driving up both the U.S. dollar and Treasuries because of concerns that the leading recovery growth engine of the world could be slowing.
High Price & High Vacancy
In Beijing, the amount of residential floor space sold in 2009 skyrocketed 82% from the year before. Bloomberg reported that Beijing’s office vacancy rate of 22.4% in the third quarter of 2009. Those figures don’t include many new buildings about to open, such as the city’s tallest, the $966 million 74-story China World Tower 3.
In a separate Bloomberg report, an executive from a property advisory firm estimated that roughly 50% of Beijing’s commercial space is vacant today. Meanwhile, according to data from the National Bureau of Statistics, housing prices in China saw a 24% growth spike in 2009.
In January, property prices in 70 cities across China rose 9.5% year-on-year, the eighth consecutive year-on-year rise. Standard Chartered also noted in early February that at least seven cities saw land prices triple in 2009.
Dubai x 1,000?
What happened is that the liquidity bubble went towards the Chinese property market as developers with access to the $1.4 trillion in new loans last year built skyscrapers and luxury housing.
The surge in lending and strong house prices underscores the concern that the economy is at risk of overheating, and reminiscent of the U.S. housing bubble. Famous short seller Jim Chanos characterized China as "Dubai times 1,000, or worse,” suggesting that Beijing is cooking its books, manipulating both financial and growth numbers, among other accounting gimmicks.
Bubble Call Premature
Most analysts, however, agree that whatever real estate downturn occurs in China, it won't equal the crisis experienced in the U.S.
The issue with bubbles is the lack of an accepted scientific means to properly identify and measure. One way to look at it is to compare the China housing price inflation level with a known housing bubble – the U.S.
At the height of the U.S. housing boom in mid2006, prices peaked as much as 90% higher than at the start of their six-year climb. Based on the data from the National Bureau of Statistics, the average home price in China had shot up roughly the same percentage in the period from 2004 to 2009.
Nevertheless, China’s pricing point started at a much lower level than in the U.S. So, the seemingly equal 90% appreciation does not necessarily translate into the same bubble story.
Koyo Ozeki, head of the Asian credit research group for PIMCO, made a strong case for China's real estate market in a recent research report that:
“Given China's potential growth, its real estate market has plenty of room for enlargement over the long term...”
Ozeki’s view is based on a comparison of the amount of credit that was extended to the Chinese property sector from 2003 to 2009 equaling 40% of China's gross domestic product. In the U.S., the figure was 80% from 2000 to 2007.
No U.S.-Style Bubble
Furthermore, the Chinese aren't exposed to the low-to-no-down-payment loans once popular in the U.S. as down payments in China average 40% to 60% of the sales price. In other words, the amount of buyer leverage is much lower in China as compared with the U.S., and is less likely leading to a U.S.-style bubble.
In addition, the U.S. financial crisis was mostly a result of the securitization of mortgages, and the offloading from banks to the markets. This is not part of China’s market structure, which means the impact of a bursting Chinese real estate bubble would likely be much more muted.
Overblown By Short Sellers Agenda
Harvard University financial historian Niall Ferguson points out that:
"Excessively loose monetary policy causes asset bubbles and excessively loose monetary policy is what we have now, it's a little early to start pointing fingers and calling things 'bubbles,' however."
Essentially, The global fear perception of “a sharp new rise of asset prices = bubble” is stoked by the U.S. housing crisis, which ultimately lead to the Great Depression, and is used to further Short Sellers Agenda by the likes of James Chanos and others “talking their book” on short positions regarding Chinese investments.
Early Intervention Is Key
In the case of any bubble, the sooner the government takes measures, the less damage the bubble can cause to the economy. And Chinese authorities have already taken a series of measures including a nationwide property sales tax, and raising bank reserve requirements to slow the red-hot market.
The message coming out of Beijing right now is that policymakers are becoming more concerned about containing inflation and managing the risk of asset price bubbles. Some analysts also expect more monetary tightening from Beijing in the second quarter.
Long Term Challenges Abound
This is not to say all’s well in China. For instance, high property prices and dim career prospects for the young college graduates (aka 'ant tribe') will continue to pose a social economic challenge for Beijing. And economic stagnation would certainly exacerbate this imbalance.
But most of these challenges are long term in nature. If it took almost 20 years for the U.S. subprime mortgage bubble to pop, China conceivably should have plenty of time to still expand while implementing proper policies and measures to prevent a US style asset bubble collapse.
California & Greece Before China
So, Jim Chanos` view of China appears to have some premature conclusions based solely upon flawed analogies with the US real estate market without taking into consideration the different cultural and market factors.
Meanwhile, in light of a Bloomberg report (h/t Mark Turok) indicating many “money-is-no-object” Chinese investors are traveling half way across the globe to buy up distressed properties in Los Angeles, California at an average price tag of $3 million, the following should serve as a timely advice:
The likelihood of California (and/or Greece) becoming a vassal state of China seems far more imminent than a bubble burst in the East. Place your shorts wisely.
"Reputation is a bubble which man bursts when he tries to blow it for himself." ~ Unknown
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China is absolutely, without any doubt, a massive bubble.
However, I suspect it will get even bigger still. Just wait until 500 Million to 1 billion Chinese have Visa, Mastercard and American Express cards. It's a virtually untapped market so far. This global ponzi won't end until it has imperilled everyone who eats, sleeps and breathes.
I think they are about where the US was in 1987. Since time is much more compressed now and the world moves so much faster, they will destroy themselves in about 2 years.......
Many folks don't even know it since they are so self-absorbed with their own lives, but we are living through the most fascinating time in human history..........
Chanos is early and will most likely get run over, not that anyone should really give a damn..........
If it took almost 20 years for the U.S. subprime mortgage bubble to pop,
Seems to me "20 years" is quite the stretch.....I was in banking from mid 80s to 2000 and subprime mortgages, as i recall, didn't start popping up much until later 90s. I can tell you for a fact that up until 2000 (at least) Home Equity loans and lines were still underwritten in a very conservative fashion.
China is Fannie Mae on steroids. "Cultural Revolution II coming soon to a theatre near you." As I have mentioned before, I don't think there is anything worse than commie stupidity combined with capitalist greed. The problem is, commies will always come up with a scapegoat, and I am afraid that scapegoat is going to be the USA.
PS. I have a little bit of experience on this subject.
Commie, eh?
As Rick would say, "i think this is the beginning of a beautiful friendship."
You have to factor in the cost of upkeep for vacant buildings. If upkeep on all these vacancies isn't done, their value will of course plunge. Maintaining malls, houses and office space costs more than maintaining piles of stored copper, iron ore and coal.
the analogies break down
the worst analogy is: China is like the US in the 1930's. The social and demographics caomparisons aside, China is not going to rule the world by driving more automobiles, creating a middle class, and moving to the suburbs. If anything China is late to the industrial revolution, a hundred years late, the opportunities for expansions are limited, the political system is moribund, and their ability to create new technology is limited by a politically repressive government.
second worst analogy: China is like Post War Japan. Again the comparisons don't hold up. Although Japan was only a hundred years out of the fuedal closed state, it joins the world economic system, and was a major world power by 1940. If anything China is like pre-war Japan.
most likely analogy: China is like Russia. The historical, racial and geographic comparisons are closer. The story of Russia and the great capitalist enlightenment has never materialized. Wall Street is always selling Russia, and the deal never goes through.
Let´s make this simple....
China has an interesting time frame in which to operate....
Is it not interesting how long government impositions can last...
How long did the free ice cream last in the US...
20¿ years....the US Govt. imposed its will in the free market for houses....
And look at what has happened...
Over 40% has been removed from both equity and credit sources....
The point being that this was a 20 plus year process....
Given how China is even more pronouced in its govt. economic impositions.....20 years ....before market corrections ....could easily transpire.....
Is Chanos prepared for this....If I were a client I would not be waiting around for 20 years...
................................
The key point being the restoration of the 40% loss in equity and credit in the US....
Already one easily sees that under the current govt. admin....The tax portion of prices is going to dramatically increase per business....which means that the equation of valuation ¡ income plus debt is going to further diminish the valuation of businesses.....and is going to make final prices even less competitive versus BRIC....
From a manufacturing revitalization point of view regarding the US....the US needs for its currency to devalue vs BRIC....to the extent that its labor is cheaper than that found in BRIC....and from the evidence so far....Is this not exactly what the FED is doing ....
The point being that a US dollar devaluation would certainly benefit the Chanos strategy....
Man has the quality of content on ZH gone down. This article struggles to make a point and is so subjective as to be a waste of time.
Investment rule #1: Whenever a company or entity focuses on attacking the shorts, run fast, run far.
I have my own opinion.. we all do.. when china gets stuck with
all the US Gov. bonds that are junk ( default status ) they will
demand from Oh-boma we want the state of Oregon for payment.
He will say yes ...take it but the people of Oregon will not leave.
they will get out the guns.. ( and rightly so ) Oaklahoma people
wil drive up to Oregon and back them up.. ( god bless them ).
The us military will have to choose who to back up...
Things will get ugly...
Classic strategy... casting a piece as an attack on evil, speculative short-sellers (as opposed to virtuous long-only investors).
I pretty much have the same answer for both sides... if the investment banks weren't hedged and didn't run stops against the mortgage derivatives in their portfolio, fuck 'em, let 'em die.
Same thing for Chanos... he can believe whatever he wants, but if he gets burned because he doesn't have stops or hedges, you know, fuck him. Evolution in action.
Only difference is, IBs get to legislate their will against the US taxpayer. Chanos doesn't.
Chanos is absolutely right. The Chinese export market has been decimated, we and Europe are it, and we and Europe are strapped. Those of us who aren't strapped aren't strapped for a reason: we probably don't blow money on the shit they make over there and are relatively more conservative than the rest of the country; or, just have better luck.
Chanos' bet all comes down to timing. He may be 100% correct, but if his timing is off and the Ponzi drags on longer than he anticipates, especially if he is (almost definitely) playing with leverage, he could blow before China does. However, someone is going to make a killing when the Ponzi implodes.
In this case, it's better to be lucky than good.
"we and Europe are it"
Really? I read today that Brazil is now China's biggest trade partner.
Markets are important and China will either get this right or blow up. Given that politicians (particularly of the communist persuasion) cannot control themselves (no pun intended) my bet is with Chanos although as another poster said re timing: it is better to be lucky than wrong.
History tells us that during every period of rapid economic expansion bubbles form. Whether this be in the railroads of the 19th century, the car industry of the 1920s or more recently with the dotcom and telcos boom of the late 90s and early 2000s. However, even though most people who invested in these markets ended up losing money, all these things brought great improvement to the wider economy and our quality of life. I suspect that most people who invest in China over the next few years will end up losing money, even though I expect China to continue to grow strongly, as equity investors end up paying far too much and forget the downside risks.
As for Chinese real estate, the question is, why should it be any different to anywhere else in the world? History shows that property speculation is the one habit of financial recklessness we cannot shake. I can see no reason why China will be miraculously spared, the more so given stories of third mortgages and vacancy rates. If the BoC wants to cool inflation restrict lending, it will be those most leveraged that will suffer the most, which always seems to be property speculators.
For prices to be sustainable, we need to see across the board wage increases, but the problem the Chinese government faces is that rising wages lead to increase in automation, which tends to lead to rising unemployment, which is their greatest fear. The authorities may take the view that letting the property market cool will prevent a wider economic problem later down the line and a 10% decline in prices is hardly a collapse, but if you are leveraged ten times, your equity is wiped out.
As for Chanos, he cannot simply short MBS as Paulson was able to do in the US, so he is taking a more oblique angle and betting against businesses linked to construction. Again, you do not need a total collapse for these bets to pay off, you simply need to find overpriced, over leveraged businesses.
So, I think Chanos is making quite a specific argument which I agree with, the question is will he be able to correctly trade this view?
Okay, China may have done Japan in response to a slackening, build things...but here's my question, while this may not be sustainable, is it the same thing as a bubble?
Apparently Incas did the same thing...when they had built all the roads they could, they started doubling up...because a busy populace is a distracted populace. May not yield much in economic return, but maybe better than feeding people to do nothing or not feeding people and keeping wealth to yourself, as we know where that ends...
I'll bet Chanos is correct! 80 billion sq. feet built. 50 billion residential and 30 billion commercial! High-speed trains to nowhere and housing that will be torn down just to be rebuilt. These are just a few examples of major problems brewing in China.
China> No ones beats America.
The only country where you can live in your house for free, and get a juicy stymulus check and job.
Whoever thinks America has been capitalist anytime is brain dead.
America is the worst FAKE "capitalist" country ever existed.
Denial is a beast. We won't have to wait long to see how the next chapter looks. Come November either this is all about to change or the time to execute the exit strategy. While America walks a plank the best move will be to dive off starboard and swim for it.
USA ain't dead yet.
The only "argument" you make for why property in China is different from the market in the US is loan-to-value. I would argue that your data is a lagging indicator, and that the lending waterfall beginning last year in China changed the whole game. Maybe the analogy is more like 2004 in the US, where existing homeowners sitting on years of built-up equity still skewed overall US housing data even though the NINJA loans were beginning to have an impact. Later, as we all know, the lax lending standards had a far greater impact as the percentage of silly loans grew, and then everyone's equity got hammered.
One can make a more convincing (talking my book?) argument than China's price/income is far worse than 2007 USA, and then enhance the argument by introducing subjective factors such as who the heck is going to absorb the massive supply of new space when the world isn't exactly booming.
China is an economy built on a small number of concepts, few of which give a cynic comfort. Yes, they have a lot of people. Massive amounts. Twenty percent of humanity is from the PRC. Growth has resulted from waiting for someone else to do the heavy lifting (invention and discovery), then stealing it and competing on the basis of price rather than quality. The real estate "bubble" grew up to support this scheme and recycle capital flows. Underneath the glitzy exterior of all of those brand spanking new buildings, however, are companies dealing primarily in t-shirts and carnival prizes, hardly high value added products. And under many of the other glitzy exteriors are bare and unfinished interiors.
Massive real estate appreciation takes away the cost advantage, which destroys profit, which diminishes wealth, which saps liquidity, which hammers asset prices. Weak international economies lead to protectionism in addition to decreased sales, exacerbating the problem. Low domestic wages (Chinese Middle Class is hardly American/European/Japanese Middle Class) do not offer a substitute domestic market. Debts---of which China now has many---go bad. China may be on the "other side" of the world, but gravity still pulls in the same relative direction: down.
Maybe it's not 2007 in China. Maybe it's only 2004. On the other hand, maybe it's September 1929. Or I'm just talking my Kindle.
good point about housing analyses in early 2000s, there was plenty of backward looking stuff down in 2004, that looked at 2003, 2002 that said we didn't have a bubble...but we did....but we also got way worse in 04, 05...and having refi'd in 2002 and then in late 2009, it is funny how in just those few years I missed all the loose standard, despite good FICO, steady employment, no bad marks or complications, lots of equity even now...in 2002, I got ripped on a $120 unpaid doctor bill , that was 6.75 year old, due to an insurance dipsute...and in 2009 I got all kinds of crazy questions about the many people with my same name who had different birth dates etc...meanwhile, somewhere in the middle there I could have gotten 3 times as much money with hardly a question, it was a quick reversal in lending standards.....China could have gone very awry in last two years and it would not necessarily show yet...
"if it took almost 20 years for the US subprime mortgage bubble to pop"....
The authors of that should try doing some research next time.
Let's see...subprime paper from the early to mid 2000's starts imploding en masse in, hmmmm, 2006, 2007, 2008.
20 years huh??
It's the lending standards that mattered, not the name.
Look at the cast of characters that left upper management at the GSE's in 2005. The perps in this racket always knew when to get the hell out of Dodge.
They stepped on to their yachts and kicked the dingy in flames towards Niagra Falls.
US housing prices grew from 3x gross family income to 5x (in SoCal 10x).
In China, housing prices went from ? gross to 90x gross family income in Shanghai. What's the reference point for the author stating "
Nevertheless, China’s pricing point started at a much lower level than in the U.S. So, the seemingly equal 90% appreciation does not necessarily translate into the same bubble story.
"
"This is not to say all’s well in China."
Let's clarify that: China is out of control.
The real estate overhang in Beijing highlighted above is only the tip of the proverbial iceberg. Leveraged malinvestment in that sector is repeated across various industries (particularly infrastructure) and all geographies (most notably in the Pearl River and Yellow River Deltas). Underlying this systemic problem is the Chinese Communist Party's emphasis on GDP growth; instead of glorifying Mao's Little Red Book, we now have cadres clamoring for development at all costs. When you have a political mass movement in China, the result can only be disaster.
Deng's version of Mao's "Great Leap Forward" will end in ruin. Go to China: breath the world's worst air pollution, drink from ink-black rivers and lakes and eat (if you dare) food tainted with pesticides.
If Chanos expects to make a windfall on a big down move in China, he is a couple of decades too early. He should be buying Chinese solars on weakness and sitting on them!
Leo: Please name 5 Chinese solars we should be interested in. Or 1, if that is proprietary. Better yet (and maybe you already did), write the article that describes the solar opportunity.
And Chanos is right about China real estate. A supporting factoid is that speculative dollars have fewer assets to chase than here and thus the bubble effect. But, I think the bursting of the bubble is not as catastrophic as here due to higher equity requirements, and an overall lack of over-leveraging in both the private and public space. The Chinese truly can pay guys to dig holes and guys to fill them if they want to, because they are paying cash. Same with building empty office buildings.
This round for solar has peaked. In order to get solar to the next stage plenty of capital will be required. Intensive capital.
Where shall we look for the successful deployment of Solar: This Generation? Spain? Germany? Where would Solar:This Generation be without massive government subsidies?
So the next round of massive government subsidies are lining up around the block? Maybe in China. And perhaps this is where Leo makes a point. But that won't mean Solar: Next Generation is going to be here anytime soon. Give it another decade. But even if China did pump steroids into R&D who would believe that technology would be anyone's ball to play with other than the Chinese Govt? Which brings us to transparency. (LOL) Perhaps the clues will be available in Form 10K.....yeah right.
Climate science hoax. Spain's high profile "green job" 'snow job'. Germany surrounded by vagabonds. Climate science hoax. That's plenty to put the trade winds in front of new massive spending by government. Equity dilution may be the only option to raise the dough to get them to Solar: Next Generation. Solar: This Generation is freakin expensive. As you all know Mother Nature doesn't play by Rahm's book. Soros' book. IPCC's book.
Very hard to generate power under three feet of snow.
ZH has implemented a new anti-spam software which weeds out spam comments after x number of junk flags. I have raised my concerns over this as I am routinely flagged by the fleas around here. That is why my previous posts disappeared. I told Tyler and Marla that contributors should have immunity to flags since we contribute our time and energy free of charge and deserve some respect.
As for solars, pay attention to what DE Shaw, Citadel, SAC Capital and other top funds are buying or accumulating:
http://pensionpulse.blogspot.com/2010/01/hot-hedge-fund-trades-of-2010.html
But also keep in mind they churn their portfolios often. I track these Chinese solars carefully:
http://finance.yahoo.com/q/cq?d=v1&s=csiq,jaso,ldk,sol,solf,%20stp,tsl,yge
Cheers.
Leo, I disagree with many of your views, but I have to commend you for that wonderful photo of the gyro sandwich (with a glass of beer quietly there behind it) that you placed in another thread this afternoon.
Looked delicious! Getting hungry just thinking about it...
"The issue with bubbles is the lack of an accepted scientific means to properly identify and measure."
It should be fairly easy - is it sustainable? You knew something was wrong in the US when people who made less than $50,000 per year could get a $500,000 mortgage. There was no way they could afford it and were just hoping to sell to a bigger fool after a year or two.
They are taking some nifty steps to curb property speculation alright. Here are my favourites:
1. Slapping a hefty surtax on properties sold within 5 yrs of purchase (following Singapore's example)
2. Requiring extra downpayment for each consecutive property bought after the 1st (but can be bypassed easily)
3. Restricting bank lending (much more effective than no.2)
4. Forbidding land developers from hoarding vacant plots in cities (best of all)
Last but not least, an interesting tidbit to share with those genuinely interested: Sick of hearing all those comments regarding 'ghost apartments' etc.? Well, ignore them. They don't know what they're talking about.
China's key cities are run as semi-independent municipals, under separate immigration laws applicable to locals only. Meaning, domestic migration is tightly controlled until such time when it is desirable (eg. when job availability can absorb the new migrants). So in essence, when conditions are right and jobs are aplenty, they will allow empty apartment blocks (within, as well as in surrounding satellite cities) to fill up by easing municipal/provincial immigration.
Those in the West may or may not agree with this policy - ie, pseudo-segregation. But i personally have no problem with it. Better to let the peasants stay on the farms than let them relocate to cities only to find there's nothing to do (thus probably tempted to engage in socially disruptive activities - like prostitution, petty crimes, or rioting on the streets).
Note the difference between a domestic immigrant and a migrant worker. One has official residency status while the other does not. Also, this is an age-old policy passed down from ancient times, known as "Hu Kou Zhi" (roughly translated: "familial unit policy"). It was left in place by the nationalists, and subsequently communists, simply because to govern a country as large and diverse as China, population control (movement thereof) is vital.
Who'd want to live in the hills of Jiangxi, or the arid deserts of Gansu/Qinghai, or frigid plains of Heilongjiang (-40 degC winters!), if everyone who wished to could relocate to warm, prosperous Shanghai? What will they do there?
Perhaps in time this too will change, and everyone can live in their own version of paradise. That'd be a long enough timeline indeed.
So, what you're saying is the government is preventing people from moving into empty offices and homes and this is OK. How do the loans taken by the developer of the empty units get paid back?
There is always a market among speculators. We Chinese, afterall, are well-known (indeed notorious) throughout the world for our penchant for gambling. That is the whole point of this tightening exercise.
What you will eventually see after the cooldown are projects abandoned halfway through, and the weaker developers quietly disappearing. There will be units paid for but uninhabitable. In Haikou, provincial capital of Hainan province, one can still find incomplete projects from the mid 90's, victims of a property bust long forgotten.
The telling sign is, as always, what is being built rather than what price it is being sold at. There will always be a market among speculators - while the authorities are not looking.
after listening to the Chanos presentation, he makes the classic short sellers case for the collapse in China. but all gamblers have two concerns, one is being on the right side of the trade, and other is getting out of the casino with the money. in the end you wonder if the people on the other side of the trade will be able to cover their positions, and then you wonder if the vampire squid won't put a bid under the Chinese market.
Chanos may have made one mistake, making his position public, however if he has the assets to precipitate an assault on the Chinese market, then more power to him, but I don't think Soros ever wore his portfolio on his sleeve.
Arguments in this article are pretty weak. The rhetoric sounds like a Chinese government bureaucrat is asked to write a rebuttal to Chanos. of cause Chanos could lose big, but if so it is because of timing not because of validity of his thesis. Sure he is talking his book. But just like David Einhorn said, "I have to say something sensible, people not going to believe me just because I am David Einhorn"
So question is if China is a bubble. it is not difficult if you use your commonsense. Here is the hint, in every mania in human history people tried so hard to prove they are not doing something stupid, "because this time is different so tree can grow to sky (and it grows to sky straight)."
AB, your post is a loose assembly of facts & various data wrapped in a subjective opinion. You need to pull it together into a more visual format. If China RE is in a bubble, it will be most visible on a graph. If you have it, please post it. "One picture worth thousand words." Asian proverb I believe...
Confucius say, "Man who has hand in pocket, feel cocky."
The Chinese may not have subprime, but they've been offering 3rd mortgages:
http://www.cityscapeintelligence.com/breaking-news/real-estate-investors...
And housing based on price-to-income and price-to-rent its a bubble:
http://www.theepochtimes.com/n2/content/view/22462/
"Most analysts, however,"
When was the last time most anylsts were right about anything?
there are so many people out there talking their own book... i feel as if i'm in a library.