BEIJING (TheStreet) -- Short-seller Jim Chanos correctly saw Enron's problems before they engulfed the company. He's now making media appearances identifying China as his next short idea, specifically the Chinese commercial and residential property markets.
Chanos famously referred to these markets as "Dubai times 1,000," foreseeing a cascading effect of property developers defaults, non-performing bank loans, bank losses and reduced lending, a pullback in further development and jobs, and a sharp drop in demand for commodities.
Jim Chanos, founder and managing partner of Kynikos Associates.
In short, according to Chanos, China's property market -- supporting the Chinese economy, which is the last engine powering the global economy -- is about to melt down.
He's put his money where his investment thesis is by shorting internationally traded commodity and infrastructure companies and Hong Kong property developers with exposure to China.
According to a
New York Times
article from January, Chanos only started studying the China market last summer. He has apparently never visited the country and has joked on TV appearances that he will never be able to visit the country now that he's made such bearish pronouncements.
Instead, Chanos -- like a lot of other Western commentators -- bases his views on statistics and the opinions of other Western talking heads, many of whom also haven't been to China lately, if ever.
There's a Chinese saying: "If you visit my village in three months, you'll notice small changes; if you visit my village in six months, you'll notice big changes; if you visit my village in a year, you won't recognize my village." Chanos and other bears haven't even visited the village yet to kick the tires.
I've been in China for the last 10 days and traveled around the four largest cities -- Beijing, Shanghai, Shenzhen and Guangzhou -- and the surrounding countryside. I've met with the management teams of eight Chinese companies. I've talked with two dozen other people living in China, including accountants, financial advisors, and property developers. I'm convinced Chanos is dead wrong is his conclusions about how the current Chinese property boom will play out. Here's why:
- China is successfully transitioning to a domestically driven from an export-driven economy. The $570 billion stimulus package last year from the Chinese government is having an effect. Unlike in the U.S., where money is spent keeping municipal jobs and bailing out banks and auto companies, the Chinese stimulus is going into large infrastructure projects like high-speed rail, highways, and public transportation, as well as directly into loans. These projects make China more self-sustaining economically, supporting property pricing. Even when there have been external shocks recently, like after Lehman failed, property market prices here didn't decline.
- Ghost towns are nowhere to be seen. There have been sensationalist claims of China's overbuilding coming from the U.S., including by Chanos. I've been looking for ghost towns during my visit in every town and through the suburbs; I haven't seen any. Building is happening based on demand, not based on "no doc, no income" loans.
- Leverage isn't an issue in the Chinese residential real estate market. In China, you must put 30% down for your primary residence and up to 50% down for secondary properties. Owners are on much more stable footing as a result and home ownership is high. Rentals basically don't exist.
- Migrant workers continue to swell city populations at a rate of 10 million a year. These workers are coming to Chinese cities from the farms for jobs. New building has to happen in the cities to accommodate this increased population.
- Nonperforming loans are decreasing, not increasing, in China. Conventional wisdom says, that with all the sloshing around of stimulus money in the Chinese economy, dumb loans are bound to be made and defaults are imminent. Yet bad loans are down. They might grow in two to three years, but the Chinese economy also will grow. Banks like Industrial and Commercial Bank of China, Bank of China and China Construction Bank are the largest in the world and are in the process of raising money from the capital markets.
- Most mid- and large-sized property developers in China are in stronger capital positions than suspected. Many have listed on Hong Kong's exchange and have adequate capital needs. Even if there was a downturn in prices, these larger developers would be insulated and able to ride out the correction even for a prolonged period.
- The Chinese government is the ultimate "Greenspan put" for China. The Chinese government has the motivation and means to do whatever is necessary to keep its economy growing. It will tighten the valves if it sees the market overheating. A drop in prices of 25% to 33% would shake out some smaller property developers in a way the Chinese government would likely see as healthy. That price correction also would stimulate demand to step into the breach. If there was a risk of a more prolonged drought, the Chinese government would act further. If there are some bad loans on the Chinese banks' or private trust companies' books, the government would -- if needed -- buy them.
The last seven years in the U.S. represented the last gasp and subsequent fallout of an unprecedented 25-year credit expansion. What's going on right now in China is not at all bubble-like, but more the equivalent of the building out of the railways and highways that opened up the Western United States to the full benefits of capitalism. Property prices are increasing in China, yes, but in anticipation of the expected growth in the coming decades.
At one point in the
article, Chanos draws support from an author named Gordon G. Chang. "It's going to be a bust," agrees Chang, whose own book on the matter is titled "The Coming Crash of China." The trouble is Chang's book was published in 2001. You would have been wrong to bet against China then, and you'd be wrong to bet against China now.
At the time of publication, Jackson's fund held no positions in the stocks mentioned.
At the time of publication, Jackson had no positions in the stocks mentioned.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson