Muddy Waters founder Carson Block sat down for a short interview at the FT’s Camp Alphaville conference, and walked us through some ugly numbers for China’s GDP.
He says that he believes that when China’s real estate investment bubble does burst — after the government can kick the can down the road no longer — the country could see a 20%-25% decline in its GDP.
Here’s how Block sees it:
- China has destroyed capital by throwing it at a fixed asset (real estate) that will never return more than the cost of capital.
- Consumption, he says, is “just not going to repay the debt… and at some point these chickens have to come home to roost.” At that point, before things get better, they have to get worse.
- Yes, household consumption has gone up 7%-8% over the last decade, but that’s only telling you how much waste there is in the GDP number. Say household consumption is still 45% of “non-excess waste GDP,” says Block, “well that implies that the GDP minus these excess waste fixed asset investments should be about 20%-25% lower than it is presently.”
Block continued, “This isn’t scientific.. but I think that household consumption number is a better number because household consumption is a function of household income.”
Watch the full interview below: