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.|
- 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.