Jim Chanos, founder and president of New York investment company Kynikos Associates, is an unapologetic China bear. Earlier in the year, Chanos famously described China’s fixed asset malinvestment and manufactured growth as “a treadmill to hell“. He then recently followed up with a cracking interview/article in Fortune, describing in detail some of the key problems afflicting the Chinese economy. Now Chanos has continued his crusade with the above interview on CNBC.
According to Chanos, China’s over dependence on real estate construction is worrying. China has built entire cities that are now sitting empty. Yet, despite this over building, construction is continuing, with 12 million to 15 million residential units this year. These units, which are priced similar to those for US residents, are intended for Chinese workers who earn about $3,500 annually and are in the bottom 20 percent of wage earners. To make matters worse, many of the Chinese who have moved to cities from the country are construction workers. So when the construction slows, many will likely move back to the country-side, leaving a construction ghost town and one massive financial black hole.
“Construction is 60-plus percent of GDP, compared to exports of 5 percent… The problem is that consumption as a percentage of Chinese economy has declined in the last 10 years, from 40 to 35 percent. It’s all real estate…When construction is 60 percent of your economy, and you are building lots of things that people don’t need, the state may let this get out of control… It’s hard to manage this type of bubble”.
And in what should send shivers down the spines of all Australians, Chanos warns that steel, iron ore, cement and other materials needed for construction will be “under pressure”.
Finally, Chanos warns that with their very low margins, Chinese companies cannot absorb any increase in costs, such as wages, which need to rise to accommodate rising inflation. And many companies are going to lose money if they aren’t already. Many of the companies Chanos has looked at also have accounting issues.
Regardless of your view on China, this interview warrants your attention. For reasons explained previously, even if Chanos is only half right, the impact on Australia could be catastrophic.