Jim Chanos Happy With Short Position In China

This morning Jim Chanos stopped by CNBC and talked about his short position against the Chinese real estate market. He pointed out that China’s economy, unlike the myth that is bandied about, is mostly driven by construction and not by internal consumption or exports. According to new data Chanos said that China’s construction industry accounted for 70% of GDP.

Compare that with the peak levels in the US and UK back in 2005-2006 at 16%. As well, on a per capita level, China is building 2.5 times as many new homes as the US built at the housing peak in 2005. There are also some strange differences. For example, even in this hot property market, no one wants to buy a previously owned home. Everyone prefers to buy a brand new house. This is why you have whole buildings sitting empty, as “investments”.

Chanos also refers to the statistic that I mentioned before: the value of housing in China relative to GDP is approaching the peak level last seen at Japan’s bubble top in 1989 and at the peak for the Irish real estate bubble top in 2007.

Powering the real estate related sector is a growing credit bubble both within the traditional banking system and the shadow banking system. Chanos estimates that they grew 25% and 10% respectively (relative to GDP). That means we are seeing a 35% total credit expansion to drive a 9% GDP growth. Or put another way, $3.5 of credit expansion to deliver a $1 of GDP growth – clearly unsustainable.

The eventual implosion of the Chinese market will spill over into all other markets. Chanos actually believes that the US market will be relatively insulated because of its dependence on internal consumption. But you can bet that real estate markets like Vancouver and Australia that have benefited indirectly from the real estate bubble in China will feel the after shocks.

And of course, the first point of impact will be raw materials and commodity markets and commodity producers. Which brings us to an interesting segue. Chanos mentioned that he is short integrated oil companies like Exxon Mobil (XOM), Royal Dutch Shell (RDS.A), Petrobras (PBR) and long BP PLC (BP). That sounds very familiar: Energy Sector Reaching Exhaustion Point.

You may also want to check out Michael Kahn’s recent commentary about oil and oil stocks here at Barron’s.

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2 Responses to Jim Chanos Happy With Short Position In China

  1. Fouad Sayegh says:

    China,I believe, will continue to confound us because neither our economic experience nor our cultural perspective are valid points of reference. Mr. Chanos may yet be proven right, but to compare the level of construction as a percentage of GDP to anything that Japan or the U.S. has experienced is so naive as to be disingenuous. Of course construction is going to be huge in China for the simple reason that China needs everything that we have had for half a century and more : roads, highways, bridges, modern apartments…etc.
    As to residential construction, the game there is so different, for cultural reasons, that our standards barely make sense to the Chinese. It is not uncommon in China for people to pay the full price of a home in cash. Also ,the percentage of the down-payment is on average much higher than in western countries. And flipping has been hit very hard by new rules that impose a hefty tax if one sells within five years.
    And where in our experience did we have a billion people, still at subsistence levels, who are keen on joining the new economy.
    If China falters it will be because of rapidly rising wages due to labor shortages, but rapidly rising wages bring macro benefits that may prove Mr, Chanos wrong.

  2. Simeon says:

    The wheels are finally coming off the rickshaw. China may still have plenty of folks who need modern housing but if they can’t afford the goods, prices will have to drop substantially before they can move in.

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