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.