A swag of China bears have emerged on the international investment scene through 2010, prominent among them Jim Chanos, founder of the New York-based Kynikos Associates, who last year famously predicted a massive slump after excessive property investments in China. How did Chanos come to his view of the risks in China?
In 2009, when he and his team looked at commodity prices and the stocks of big mining companies, as Forbes reported in November ‘Everything we did in our microwork [on commodities] kept leading us back to China’s property market‘, Chanos is reported to have said. China’s construction boom was driving demand for nearly every basic material in the world. Chanos reckoned the scale of China’s building boom was unsustainable. Analysts told him the Chinese were building 5 billion square metres of new residential and office space a year — 2.6 billion square meters in new office space alone.
His response: ‘You must have the decimal point in the wrong place. Do the math: That’s almost 30 billion square feet of new construction. There are 1.3 billion people in China. In terms of new office space alone, that amounts to about a five-by-five-foot cubicle for every man, woman, and child in the country. That’s when it dawned on me’ Forbes reports Chanos to have concluded, ‘that China was embarking on something unprecedented’.
Unprecedented, definitely yes. Unsustainable at the current pace of growth? That’s a bigger and significant call.
In his essay, Huang argues that the fundamental difference between China in 2010 and Japan in 1989 or the US in 2007 lies in the balance sheet position. Before the meltdown in Japan after 1989 and in the US after 2007, the balance sheets for the government, companies, banks and households were already in very bad shape – they all had very high leverage ratios or debt burdens. It only needed a modest change in either policies or prices or both to trigger a major meltdown.
‘China’s current circumstance is very different. The bears on China worry about fiscal sustainability, especially given the reckless spending habits of local governments. This is cause of concern, not an immediate trigger of crisis. Even if we count unfunded pension funds, local government borrowing and potential non-performing loans, total public liability is still only around 50 per cent of GDP. Over the past years, fiscal deficits widened to about 2 per cent of GDP. But fiscal revenues have been growing by around 20 per cent per annum for more than 15 years. Although the growth rate slowed to 9 per cent in 2009, it rebounded to 21 per cent in 2010.
‘The property bubble is the most important evidence supporting the case of the China bears. Property markets have obviously shown signs of a bubble, judged by usual indicators such as the price/income ratio, rental yields and the vacancy ratio. But normally, collapse of housing bubbles is triggered by either sudden slowing of income growth or the dramatic tightening of monetary policy. This can happen faster if households have already become overly leveraged. But this is not yet the case in China. Mortgage loans account for about 12 per cent of total outstanding loans. This is equivalent to 24 per cent of GDP, only a little over household income in one year.’
Huang concludes that although these factors suggest that, while the risks may be on the rise in China, a collapse or bursting of the bubble or crisis are unlikely in the near future. The fundamentals supporting macroeconomic and market stability are continued strong economic growth and very healthy balance sheets for the government, companies, banks and households. The risks for the Chinese economy in 2011 are unlikely to come from the liability side. Liquidity, however, has become a bigger challenge for the Chinese policymakers and investors.
Growth is likely to continue at a healthy pace in 2011. The real question is whether the Chinese authorities can get liquidity and inflationary pressures under control without more activist monetary and other (including exchange rate) policies. In the end, they’ll have to, he reckons.
Perhaps the title should read “Asia’s Economic Risks”… because if you are in Australia, South Korea, ASEAN or Japan, Chinese economic risks are now also your economic risks.
http://www.mckinseyquarterly.com/newsletters/chartfocus/2011_02.htm
The above is a brief version of an extensive study McKinsey did last year. I depend on the EAF for news, but often, the slant – usually pro-Asia and anti-US makes me quite sad, as it is also usually misinformed.
Absolutely we are in financial problems, absolutely we caused OUR OWN problems, but the constant labeling of the US as the cause of everyone’s woes is irresponsible. Each country has primary responsibility for it’s own problems. But, none of your ‘contributor’s like that point of view. It’s sticky. You’d have to address it and account for it. None of you are willing to do that.
Then there is the business of weeping because the US doesn’t spend enough time coddling Australia, Japan, S. Korea, etc. You all depend on the US for support in so many ways, then enjoy blaming the US whenever you are unhappy. I would love to be a contributor – but, I am but a US housewife. What on earth could I know?
I know that the EAF starts each article with assumptions that are not necessarily so, and often extremely biased. It lessens your credibility. But, you probably don’t understand that. Sorry.
No, frankly, we don’t. The analysis on this site comes from a wide range of authoritative sources from around Asia and the Pacific, including from the United States, and from many perspectives. To label the range and diversity of views that is expressed here as biased in the way you do would not seem a reasonable response to whatever particular view it was with which you happened to disagree. Let’s hear what precisely it was you would like to criticise and a reasoned view of why. We’d be delighted to publish it.
Editors