By Lloyd Graff
Jim Chanos is famous for identifying the Enron scam, shorting the company’s stock and making a fortune. He runs a hedge fund named Kynikos Associates, which means cynic in Greek. He specializes in spotting emperors without clothes and is currently betting big that the Empire of China is a naked power.
He compares China to Miami and Dubai of recent memory. The common thread is runaway condominium and office construction, huge real estate inflation and a shortage of able buyers. He says that today, all over China, high-rise buildings are rising, fueled by aggressive bank lending to developers. They are building 1,100 square foot shell apartments without floors, and selling them—or attempting to sell them, for around $150,000. The problem is that even though half are going empty, they are still building. With middle class dual earner couples earning an average of $3,500 a year, buying a $150,000 apartment would be the equivalent of an American couple making $40,000 a year buying an $800,000 home. We saw how that worked out in 2007.
Chanos sees the phenomenal growth numbers in China being fueled primarily by real estate speculation and construction. In his view it is unsustainable. State and local governments are being funded by real estate development, so they have an interest in seeing it accelerate. They will suffer mightily when the bubble bursts.
Chanos feels the problem in China is that the central planners set a growth goal, say nine percent, and then tell the underlings to make sure it happens. The easiest way to do it, other than fudge the numbers (which they may do), is to let the builders build with easy money.
What happens if Chanos is right and the giant cranes go away like they did in Dubai and Miami? He feels that the raw materials companies who are supplying the steel, copper and cement will suffer immediately. Copper at $3.60 a pound could plummet, as well as iron ore and scrap prices. Crane companies will get killed. He feels that the Chinese currency, which everybody including the Obama administration is hoping will rise when it is no longer pegged—will fall. Incidentally, Gary Schilling, the noted bearish economist who predicted the American stock market collapse (not the rebound, however) also feels the Yuan will fall in value when it is allowed to float.
Jim Chanos is a very smart guy. He sees the Chinese bubble bursting later this year or in 2011. The Chinese have enormous reserves in dollars to soften the blow and may tighten credit dramatically soon to try to avert a property crash. China bashers may be happy to see the country suffer and revel in lower raw material prices, but with an interconnected world, be careful what you hope for.
Question: Do you hope China collapses?