The most high profile China bear, Jim Chanos, came out roaring again overnight, warning that the huge Chinese property bubble could be about to collapse, with dire effects for commodity producers, such as Australia.
Chanos, who runs the $US6.7 billion hedge fund, Kynikos Associates, built up a massive fortune by predicting the collapse of Enron and other debt-laden US corporates. For months, Chanos has been warning of a Chinese property bubble.
“We’re focused on China right now because we think there’s a big speculative bubble that’s going on over there and it’s having knock-on effects in certain things like commodities and basic materials,” he said in an interview on CNBC.
He said his firm had built up short positions in Chinese property developers. “We’re also short the basic commodity companies in Australia and Brazil and elsewhere in the world.”
However, Chanos did concede that his bet had not paid off so far. “At this point, it’s been hurting,” he said.
Chanos argued that there was a false confidence that Beijing is not serious about dampening speculation in the property market. “Chinese property stocks are flat this year, they were down 20% as early as June or July. They’ve come roaring back as people think that the tightening effects have not had their intended effects and it’s going to be business as usual.”
However, he added: “That’s the paradox here. People are counting on the bubble being reinflated and it appears to us that the authorities are pretty serious in China. They want to actually cool this off.”
Chanos predicted that Beijing was likely to introduce additional tightening measures in the property market in coming months. He also argued that the measures that Beijing has introduced to date were already beginning to bite, particularly when it came to property turnover.
He said that his firm has developed an index of property transactions, not just in Beijing and Shanghai, but also including the first, second and third-tier Chinese cities.
‘At one point in July, transactions had dropped 50 to 60% in actual units sold from a year earlier. They’re still down 30 to 40% year over the year to September, so there has been an impact, transactions have slowed.”
And, he pointed out, a slow-down in property turnover usually precedes a drop in housing prices.
“If you remember from the US, it’s transactions that slow or stop first, prices follow later. But people are still willing to speculate over there, it’s hard to break that momentum in China.”
Chanos was also extremely doubtful whether China could keep its economic growth rates high by continuing to build new infrastructure, and new apartment complexes.
“We’ve dubbed it the treadmill to hell. And I think they’re going to have to run faster and faster and faster to keep those GDP numbers up.
“That’s the problem when you have construction as 60% of your GDP, and all of your GDP growth – you’ve got to keep building stuff to keep the numbers going.
“In China, it’s all about the numbers, it’s all about saving face, and I think that is the problem. There are whole apartment complexes going up next to relatively empty apartment complexes, and we’ve seen this movie before – it never ends well.”
Many China observers believe that Beijing will succeed in tempering economic growth, without pushing the economy into recession. Chanos conceded this was a possibility, but he was sceptical: “Economic history says that that’s not the way to bet. Usually things don’t end well, that they overshoot as much on the downside as they do on the upside.”
He added: “It seems to me when you’re putting trillions of dollars of new fixed asset investment into these kinds of things, where they have enough already in order to keep your numbers up, then something bad is probably sure to follow.”
Chanos also had a warning for US politicians who allege that China is deliberately keeping its currency undervalued in order to give its exports an artificial advantage in global markets. Some US lawmakers are threatening to introduce punitive measures on Chinese exports.
But, according to Chanos, the Chinese economy is not nearly as dependent on its export machine as it was previously. And he warned that the Chinese yuan could fall further in value.
“You have to keep in mind that Chinese net exports as a percentage of GDP is mid single digits. It’s not what it used to be. This is becoming more and more a domestic story for China so they don’t care as much about their currency rate.”
Chanos predicted that if there was a collapse in the Chinese property market, “the real problem is going to be flooding the market with yuan to reliquefy their banking system.”
If this happened, he said, “my concern would be that the yuan gets depreciated, not appreciated.”
This article first appeared on Business Spectator.
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