China’s property market is a bubble that may burst by as early as this year, according to hedge fund manager James Chanos.
The world’s third-biggest economy may need to keep up the pace of property investment because up to 60 percent of its gross domestic product relies on construction, said Chanos. The bubble may begin to “run its course” in late-2010 or 2011, he said . . .
China is “on a treadmill to hell,” said Chanos, who said in January the nation is Dubai times a thousand. “They can’t afford to get off this heroin of property development. It is the only thing keeping the economic growth numbers growing.”
Property prices in China rose at the fastest pace in almost two years in February even after officials this year re-imposed a tax on homes sold within five years of their purchase to curb speculation and ordered banks to set aside more funds as reserves to cool lending. The boom in China’s real estate has fueled concern that China may face a collapse seen in Dubai that has hurt the ability of some of its companies to repay debt.
Since his January prediction, Chanos, the founder of Kynikos Associates Ltd, has been joined by Gloom, Doom & Boom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s property market.
Chinese state and local governments are among the most leveraged to property-related borrowings and the nation will “ultimately” have to nationalize a lot of the bad loans that will arise from the end of the bubble, Chanos said. . .
Chanos was one of the first investors to foresee the 2001 collapse of Houston-based energy company Enron Corp. The investor said he is short-selling Chinese developers as well as companies supplying building-related materials to the country . . .
That Mr. Chanos is joined by Ph. D.'s with real interest in bubbles such as Drs. Rogoff and Faber reminds me of the disclosure several months ago that George Soros, John Paulson, Paul Tudor Jones and David Einhorn all had turned bullish on physical gold. The further good news on that gold front was that Mr. Paulson was reported to have had little success in finding investors for his gold-oriented fund, even though he had substantial personal funds in it. This lack of investor interest proves that the gold market, while not guaranteed to move in any special direction, is nothing like the NASDAQ circa 1999. It may be at a bull market peak, but it is NOT in the late stages of that rare event called a bubble. Similarly, while Mr. Chanos is not predicting the national bankruptcy of China, he appears to be predicting a temporary major decline in the global market for certain raw materials such as copper.
If this scenario unfolds, it would be a deflationary event for the U. S. The effects on the price of the gold would be unclear, but given the bull market in gold since the credit crunch hit the U. S. in 2007, there is no evidence that this event would ultimately do anything other than weaken faith in governments and debt. It therefore would strengthen the fundamental case for gold even as it weakens certain commodities prices.
Long Lake LLC 2010