“We’re not calling for an impending crash of China”, investor Jim Chanos told CNBC on Monday. Well thank God for that.
As CreditWritedown’s Edward Harrison notes:
[Chanos] is bearish on China because of an unprecedented credit-induced bubble in Chinese real estate. He quotes 30bn sq. ft. of construction underway a 5×5 space for every man, woman, and child in China. However, that doesn’t mean the economy is going to collapse.
It does mean that a huge amount of malinvestment is building up in particular sectors and will certainly reduce efficiency and investment returns. You can only deviate from the market-clearing price for so long. Eventually these command and control manipulations will come a cropper. Chanos says that China has needed ever-more fixed asset investment to keep the gravy train going.
So the crash that Chanos is counting on – like so many others – is in Chinese property. More specifically, he is betting against China property-related stocks including building suppliers. As BusinessInsider notes:
Jim Chanos continues to make the rounds, explaining his controversial (though increasingly less so) view on the Chinese bubble. A point he emphasizes: he’s not betting against China, the economy, or currency. He’s specifically negative on property. How’s he betting on that? Betting against the companies that supply raw materials for the building boom — iron ore, construction etc.
But how cataclysmic you think the consequences of China’s property price surge might be depends on who you listen to, as the FT noted recently. The pundits and investors are taking a mind-bogglingly wide range of views, as FT Alphaville reported last week – from “what’s the problem?” to “panic stations”.
Consider the view of Tom Miller, managing editor of The China Quarterly, in an article in Tuesday’s FT (our emphasis):
China’s investment-driven growth is certainly inefficient, and it is true that the technocrats in Beijing are far better at “solving” problems by throwing cash at them than by making tougher structural changes. But the idea that building more roads and houses is a waste of money is, to put it bluntly, bunk. The scale of the urbanisation process in China is so huge that plenty more investment is needed, even if the numbers look “unsustainable” on Wall Street.
Meanwhile, developers in the region have stepped up their warnings of a Chinese real estate bubble, while analysts and officials are now talking about a looming hit the financial system when prices begin to fall.
The Chanos view, as Harrison neatly sums up, is that an historic capital spending boom has produced a bubble and serious malinvestment the implications of which, at a minimum, will be very negative for companies leveraged to capital investment once the boom collapses.
Chanos is not making any macro predictions, Harrison adds. But he’s definitely getting his point across. Not least with this quip:
China has embraced capitalism to keep the socialist elites entrenched while, more lately in the west, we’ve embraced socialism to keep the capitalist elites entrenched.
Related links:
China property bubble – real or imaginary? – FTAlphaville
Now Rogers is warning about China’s bubble – Clusterstock
China’s liquid real-estate bubble – FT Alphaville
Why Shanghai real estate is the most obvious bubble, ever – BusinessInsider