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Jim Chanos has been warning of a property bubble in China for some time. Of course, he is given lavish attention for his reputation in accurately finding and exploiting the fraud at Enron.
In a recent interview he sat down with Charlie Rose and first defined what he means by a bubble: a debt fueled asset inflation where the rental income does not cover the debt expense incurred to purchase the asset. In other words, “Ponzi finance”, which requires the Greater Fool to perpetuate it.
The average residential house in Beijing is now at $3800 sq. meters a 60% year on year increase. Affordability is stretched to the breaking point with the average mortgage requiring 65-70% of monthly household income. And let’s not even get started on the commercial real estate market which boasts completely empty office building after empty office building. The speculative frenzy is so out of control that a small portion has spilled over to the Vancouver real estate market and driven it to astronomical levels.
But since 50-60% of China’s GDP growth is based on construction the government is naturally reluctant to curtail asset inflation in the property market. But just recently they have begun to take the first serious steps. For example, first home purchasers now have to pony up a minimum of 30% for down payments (versus 20% before) while an investment property or a second home now requires a 50% down payment (up from the previous 40%). As well, they are increasing the supply of land and forcing developers to target at least 70% towards low-income housing.
The sharpest arrow in the government’s quiver however remains an increase in transaction taxes. This is similar to stamp duty on stock market transactions which the government routinely manages to cool off speculation in that market. The danger of course is that they will not be able to strike the exact balance required to cool off the market enough but not so much as to kill it.
Chanos also makes short work of Tom Friedman’s “foreign currency reserves” defense of the Chinese market. More importantly, he points out that state and local governments in China depend on real estate development to finance their budgets. At some point though supply will equal demand and the consequences after that are difficult to precisely foresee the global implications. One interesting possibility is that while the Renminbi is widely recognized to be undervalued, what if mass nationalization of debt will further devalue it? That is something that almost no one is expecting.
The equity market in China has been very weak, especially in comparison to the US market. And the real estate sector has been one of the weakest:
Here are a few ways to get Chinese exposure:
- Morgan Stanley’s China A-Share Fund (CAF)
- Taiwan Greater China Fund (TFC)
- The Greater China Fund Inc. (GCH)
- China Fund Inc. (CHN)
- JF China Region Fund Inc. (JFC)
- SPDR S&P China ETF (GXC)
- iShares FTSE/Xinhua China 25 Index (FXI)
- Claymore China Technology (CQQQ)
- PowerShares Golden Dragon Halter USX China (PGJ)
- Claymore/AlphaShares China Real Estate (TAO)
- Claymore/AlphaShares China All-Cap (YAO)
- SPDR S&P China (GXC)
- WisdomTree Dreyfus Chinese Yuan Fund (CYB)
- Claymore/AlphaShares China Small Cap (HAO)
- ProShares UltraShares FTSE/Xinhua China 25 (FXP)
- Direxion Daily China Bear 3x Shares (CZI)
- Direxion Daily China Bull 3x Shares (CZM)
- Global X China Technology (CHIB)
- Global X China Energy (CHIE)
- Global X China Industrials (CHII)
- Global X China Materials (CHIM)
- Global X China Consumer (CHIQ)
- Global X China Financials (CHIX)
Chanos mentions that he is short the suppliers to real estate developers: steel, cement, glass, etc. so basically the commodities markets. He also delves into the fraud at the heart of the financial crisis and incredulously asks why there have not been criminal charges. The whole interview is really worth your while.
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