Chanos again warns on China’s bubble economy


 

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.
 
Cheers Leith   

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

Comments

  1. Leith,

    I have no doubt Chanos is right…but when. He is talking his book, same as Einhorn with the Investment Banks in 2007.

    Rogoff and Reinhardt in their 800 year study are at pains to point out that you cannot have this sort of growth without setbacks.

    The setback the Chinese are trying to deal with now is the inflation being exported by the US Federal Reserve, which to me is a deliberate attempt to force China to depeg and or re-value their currency.

    Add to the mix fake figures from both sides of the Pacific and it is impossible to know when.

    Any insights would be much appreciated.

  2. Nic you are spot on the million dollar question is not if it is going to happen but WHEN. Personally I think its next year as they are stuck in rock and hard place. Raise interest rates or let inflation pick up either way they got to slow things down.

    LBS

  3. I'm in the middle of reading "The Writing On The Wall – China and the West in the 21st century" by Will Hutton.This was published in 2006 and it appears that the problems described then still exist,only more so.

    The degree of complacency in Australia about Chinese prospects is truly astounding.But what can you expect with a Treasurer who thinks that increasing private debt is the way to go.
    And covered bonds,for heavens sake – this is a roadside bomb.

  4. If the facts are correct, one would think that no government or investor is dumb/blind enough to build that many apartments which lay vacant. Is it possible there is more to the story? Why is the Chinese govt doing this? How easily can the state forcefully take control of the vacant apartments to house the population it desires? or perhaps: 20 million is enough to house the population of North Korea, part of special deal? The list could go on.

  5. The Chinese Government is not infallible. JC points to the growth of the Soviet Union in the 1945-70 period as an example of why centralised economies can look good for a long while – but eventually results in far too many things that aren't useful or needed.

    Of course this happens in capitalism too, as we now know. Google for "ghostestates". Almost exactly the circumstances described by Jim Chanos, with almost exactly the same excuses, being given at the time. Mind you, Ireland probably also qualified as a centrally planned economy :).