Jim Chanos on China: "We're not bearish enough"

Interesting interview of Jim Chanos on Bloomberg TV, available on YouTube on the 24th of May. He explains how things got crazy in China, and how real estate development companies are way past the bubble state and so he concludes that when his research team got back from China, they concluded: "we're not bearish enough".

May 24 (Bloomberg) -- [...]

“The bubble is really on the other side of the world,” Chanos said during a Bloomberg Television interview in New York today. “What my team found, they actually came back saying we’re not bearish enough, interestingly enough,” he said. “The signs of overcapacity were even much greater than their last visit which was late last year and increasingly the executives that they met with were sounding a little bit more uncomfortable about the current situation.”

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“If you look at the balance sheets of the developers you’d be hard-pressed to see how healthy they are because they’re all loaded up with land just as our developers were at the top of our market,” Chanos said. “We’ve maintained our pretty much dramatic overweight in our Chinese shorts.”

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This is a good segue to the China bubble popping, with several reports showing things are getting really nasty.

The WSJ just published a report titled The Great Property Bubble of China May Be Popping. Here are some quotes:

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Real estate is a foundation of China's phenomenal growth record in the past two decades, and its health is crucial to China's construction, steel and cement sectors. Real estate is also a favored investment of Chinese looking to get better returns than bank deposits pay. Local municipalities and provinces depend on rising prices for land sales as well to fund infrastructure projects.
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Already, in nine major cities tracked by Rosealea Yao, an analyst at market-research firm Dragonomics, real-estate prices fell 4.9% in April from a year earlier. Last year, prices in those nine cities rose 21.5%; in 2009, the increase was about 10%, as China started to recover from the global economic crisis, with much steeper increases toward the end of that year.

A downturn in property and apartment prices would harm Chinese industry and investment, and crimp consumer spending. China is a "housing-led economy," says UBS economist Jonathan Anderson, who estimates that property construction alone accounted for 13% of gross domestic product in 2010, twice the share of the 1990s.
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Standard Chartered Bank estimates that China's so-called tier-two cities, such as Dalian and Tianjin, may have 20 months of housing inventory by year end, putting "substantial" pressure on prices. Standard Chartered forecasts price cuts of 10% to 20% "in many cities."
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Chinese officials, facing widespread anger from ordinary citizens who can no longer afford to buy a home, have sought to slow the rise in housing prices. The unanswered question is whether the government can manage to reduce prices gradually in a way that won't undermine economic growth.
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Interestingly, even in China, social mood will drive politicians to follow their will. Democracy or not, this move is ineluctable.

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Beijing has one of the most expensive real-estate markets in the world relative to the income of its citizens. Calculations based on Soufun data show that in the opening months of 2006 an average-price new apartment in China's capital would cost around $100,000—the equivalent of 32 years' disposable income for the average resident. By 2011, the average price had more than doubled to $250,000, but relatively modest increases in income mean it would now take 57 years of saving for the average resident to cover the cost.

In Shanghai, apartment sales tumbled 37% in April, to 11,000 units, compared with 17,500 units in January, according to the Shanghai Real Estate Trading Center.

11,000 sales in a city of 23,000,000 ? Doesn't that mean that actually there are statistically no sales going on at all?

Amazingly,  the crazy lunatic who introduces himself as an expert during the video available on that same page, denies the bubble, and think that everybody is buying property with cash and that banks are safe. This is a completely crazy statement, easily debunked:

1. If people were buying with cash, increasing interest rates would have practically no effect
2. The borrowing in China is extreme and banks lending at unbelievable level. Where does it borrowing come from if not Real Estate?

On this video about ghost towns in China, from Bloomberg's Behind the Wall series, you will be amazed to see how much construction is going on, and how many ghost town they have been developing. But the most amazing thing is the conclusion of the reporter: "If this is a bubble, it's unlikely to pop any time soon". He then is interviewed by the Bloomberg anchor, and he goes on and on explaining how China is investing in people (who are assets) and how great things are for this country.