Monday, February 22, 2010

Jim Chanos' "China is Dubai Times 1000" May be a Losing Bet

I have a lot of respect for Chanos. His work on Enron was exactly right and very brave, especially when you consider the political, media and investment giants who backed the company. Hell, folks as diverse as Paul Krugman, NASA's Jim Hansen, Lawrence Lindsey and Bill Kristol took the Crooked E's payola. Fortune magazine called ENE "The most innovative company in America" for six years running. Chanos stood up and said the emporer has no clothes, and put his money where his mouth was.

On the other hand going up against the Chinese government could make you broke before you're proven right.

A Twofer. First up, Bloomberg:
The township of Huaxi in the Yangtze River Delta is a proud symbol of how Chinese communists embraced capitalism to lift 300 million people out of poverty during the past three decades.

Its leaders took a farm community with bamboo huts and ox carts in the 1970s and transformed it into an industrial and commercial powerhouse where today many of its 30,000 residents live in mansions and most have a car. Per-capita income of 80,000 yuan ($11,700) -- almost four times the national average -- allows Huaxi to claim it’s China’s richest village.

Huaxi is also emblematic of the country’s construction and real estate boom. Communist Party officials there are building one of the world’s 30 tallest buildings, a 2.5 billion yuan, 328-meter (1,076-foot) tower. The revolving restaurant atop the so-called New Village in the Sky offers sweeping views of paddy fields, fish ponds and orchards, Bloomberg Markets reports in its April issue.

Marc Faber, publisher of the Gloom, Boom & Doom Report, says China is overdoing it. “It does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity,” Faber told Bloomberg Television on Feb. 11. “I think the Chinese economy will decelerate very substantially in 2010 and could even crash.”

Huaxi has an even more ambitious project coming up: a 6 billion yuan, 538-meter skyscraper that would today rank as the world’s second tallest. The only loftier building is the new Burj Khalifa in Dubai.

Dubai Times a Thousand

Such undertakings figured in warnings hedge fund manager Jim Chanos delivered in January that China is Dubai times a thousand. The costs of wasteful investments in empty offices and shopping malls and in underutilized infrastructure will weigh on China, Chanos, president of New York-based Kynikos Associates Ltd., said in a speech at the London School of Economics. “We may find that that’s what pops the Chinese bubble sooner rather than later.”>>>MORE

And from Investment Postcards from Cape Town:

Chanos could lose big on China bubble bets

This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog.

Amid growing fears of a real-estate bubble, Chinese officials moved to restrain bank lending and rein in inflation by raising China’s bank reserve requirements twice in one month. Global financial markets reacted with risk aversion driving up both the US 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 was 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 is reminiscent of the US housing bubble. Famous short seller Jim Chanos characterized China as “Dubai times 1,000, or worse,” suggesting that Beijing is cooking its books and 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 US.

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 US.

At the height of the US housing boom in mid-2006, 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 by 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 US. 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:

“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 extended to the Chinese property sector from 2003 to 2009, equalling 40% of China’s gross domestic product. In the US the figure was 80% from 2000 to 2007.

No US-style bubble Furthermore, the Chinese aren’t exposed to the low-to-no-down-payment loans once popular in the US 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 compared with the US, and is less likely to lead to a US-style bubble....MORE