Photo: Vince Veneziani
Today we post part two of our three-part Q&A session with famed short-seller Jim Chanos.Of late, Chanos is known for his contrarian stance on China, and his bet that the country is experiencing a massive property bubble. That is what we focus on today.
Business Insider: So moving on to China…
Jim Chanos: Yup!
BI: You’re short China, it’s a big thing…
JC: We’re not actually short China. We are short entities that are selling into China.
BI: Ah, OK.
JC: There is a big misconception that has been posted out there, but our China call is a simple one: there’s a property bubble going on. I’m not making a call on the Chinese economy, although it will have a problem when the property bubble bursts. We’re not making a call on the currency on whether it’ll appreciate or, god forbid, depreciate. What we’re simply saying is you are seeing an epic building boom in China and more interestingly, an epic high-rise building boom in China.
It’s not just high speed rail and airports and new roads. That’s only a very small part of their infrastructure spending. This is primarily a story about people putting up high rise office buildings and condos in the big cities. That’s what it is.
So when you look at it like that, the data supports it. I mean, people have taken a shot at us because “Mr. Chanos has never been to mainland China.” Well hell, I didn’t work at Enron either. Or “Oh, but he doesn’t speak Mandarin.”
Whatever. It doesn’t matter. Using the Chinese government’s own numbers as well as some western entities that are on the ground there, the numbers are what they are. The square footage being built is what it is. You can see it when you go there. It is a high-rise construction boom.
So when you look at it through that prism, you can begin to make some assessments. We’ve seen similar bubbles in Dubai, Miami – scores of other entities have gone through this and it never ends well.
Now, the real argument in China seems to be – the argument I think carries the most water for the China bulls – is somehow the government is going to be able to manage this. That they’re going to let the air out of the bubble gently. That 9 guys who sit on the central committee of the country who got us into this mess are going to get us out of this mess. I wouldn’t want to bet on that.
JC: History tells us that it’s a bad bet. And that somehow the government will, if I overpay for a condo, somehow bail me out. And again, I generally think that that’s a bad bet. Whether you’re Chinese or American, it doesn’t matter; it’s a bad bet almost anywhere.
The Chinese bubble has its own interesting set of anecdotes and circumstances and one of the more interesting ones from our perspective as a westerner is that when people were buying 2 and 3 condos in Miami for example, they would rent the 2nd or 3rd condo to try and get some rental income. In China, that’s not the case.
BI: People are just buying.
JC: They’re empty shells. When you buy a condo, you’re getting an empty shell and nothing more. By and large most of the developments are 1100 square foot boxes. And they [the owners] don’t rent them because people want to keep them basically as pristine as possible for when they flip them because new is better than old. So ironically, you have people that are buying multiple condos here to speculate who are carrying themselves – there’s no rental income.
The other interesting thing about the boom here is that it is completely high end. When people talk to me about China’s “migration of people” into the cities and the population and blah blah blah, and the growth of the economy, I said “That’s all and good but they’re putting up the equivalent of New York City highrises at almost New York City prices for a populous that is 1/10th of that per-capita income.” So this building boom is aimed at: A) the corporate market, corporate highrises and office buildings or B) very high end of the residential market. It’s not the masses – it’s for people speculating.
BI: I’ve heard that a lot of families in China are maxing out as much as they can in terms of credit and borrowing in order to get into this.
JC: They have to! Keep in mind that the average median income in China, and it’s only slightly higher in the cities, is something like $3500 per person. Typical second-tier city real-estate prices have now gone above $100 a square foot. So a typical 100 square meter condo is probably going to cost you after all your expenses (if you build it out to live) $120,000 to $140,000 US. Well say you’re a dual income couple and you make $7000 to $10,000 a year total. OK? Even if you put down the 20% down that everyone’s pointing to, that’s 20% on your purchase price. You’re still paying mortgage interest of probably … 60 to 100% of your income, pretax.
JC: Pretax. And that’s not super high end – that’s an urban couple, dual-wage earners in a second-tier city. So it’s already getting to the absurd in terms of prices relative to incomes. And the problem is construction is 50-60% of China’s GDP. And of that, the vast majority is this type of construction. There’s going to be a real brick wall here being hit at 200 MPH – it’s just a matter of when.
BI: So when do you see the bubble bursting for China?
JC: Well, always with these things, we’re often early and it appears we’re early here too. But the good news for office building bubbles is that they’re pretty tangible. So when you see the apartments stop selling, when you stop seeing foundations being laid, and holes in the ground, when you see the cranes not going up anymore, buildings being half-complete – that’ll tell you you’re at the end.
Stay tuned the rest of the week for Chanos’s thoughts on China, Enron, and the state of the market.
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