Video: Chanos on China -- February 2010
Bullet points are inside.
Courtesy of My Investment Analysis
*China is being seen as the savior of Western economies and the future growth engine that will bring back worldwide economic growth.
*This lecture is not a call of an impending/imminent crash in China.
*But there are classic pockets of overheating in the Chinese economy.
*Lots of overcapacity in many sectors.
* We see a lot of double counting in many GDP data points and/or missing or lagging data.
*GDP growth volatility/range is very tight. Numbers are “staggeringly” consistent for a dynamic economy with many things happening.
* Before China, the Western world was worried about the Soviet Union, which was consistently growing at 6-8% (and also had an authoritative government). People thought it was only a matter of time before the Soviet Union overtook the Western world economically.
* At first, expanding economies with authoritative governments usually attain growth through rural-urban migration, development of basic education, and an increasing capital base.
=> Economic growth through the growth of inputs.
=> The problem usually arises when inputs must be used to sustain economic growth.
* Fixed asset investment as a percentage of GDP growth in China has been very large and beyond record levels.
=> People are not taking into account future depreciation of these assets and future maintenance costs.
=> Building office space to be left unused creates problems.
* Local party officials in China typically control real estate property.
*Factories are still being built in China while some factories ‘across the street’ are sitting idle. This increasing overcapacity will add deflationary pressures to the Chinese economy.
* Chinese stimulus has been underestimated because investors usually don’t account for the massive bank lending that has been occurring simultaneously.
* Chinese people are increasingly seeing apartments as a store of value. Wealthy Chinese citizens have been buying 3-4 apartments at a time for this purpose.
=> Reminds of U.S. residential bubble in 2005-2006. People saw housing as the best way in building wealth and storing value.
* Commercial real estate bankruptcy rates are at 16-20% while construction is still out at full force.
=> Companies with idle real estate are also entering into real estate development when they do nothing related to real estate. It’s the get-rich-quick from real estate mentality.
* Around 30 billion square feet of office space is under construction. This means that the Chinese are building a 5×5 feet cubicle for every Chinese citizen (men, women, and child).
=> Given that this is one of the big factors driving GDP, what happens when all the building projects are done?
* Chinese generational savings is being used as a down payment for apartments. Thus, Chinese citizens are tying their savings to possibly overpriced real estate assets.
=> A bubble burst could create social unrest.
* Industrial commodities used in construction have been bid up by China.
* In Western economies, people are usually skeptical about the ability of central planning/governments controlling the economy and being successful at doing so; however, when it comes to China, everyone thinks 9 people in a room can get it right all the time. We don’t think so.
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