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Tuesday, April 13, 2010

China on "Treadmill to Hell"

Items of Interest:

Bloomberg: 
China on ‘Treadmill to Hell’ Amid Bubble -- 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 in an interview on “The Charlie Rose Show” that will air on PBS and Bloomberg TV.

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...

----
CharlieRose.com:
James Chanos, President, Kynikos Associates -- He is the man who predicted the Enron downfall and now predicting a housing bubble in China...

James Chanos, President, Kynikos Associates: China is on a treadmill to hell

A contrary viewpoint:
Andrew Yakovlev:
Jim Chanos, who is the greater fool? -- One thing that particularly stuck out for me in Chanos' argument is that these properties are shells. They're basically whole floors, no refrigerators, no detailing, barely partitioned. Chanos believes this further indicates that there's no future for the market and here I think he is severely myopic, because this evidence can be interpreted to the contrary especially when compared to the great Bush Real Estate Bubble. Remember shows like Flip this House? There, people weren't just buying properties and waiting for them to appreciate, they took out additional loans to remodel them. There was a huge debt fueled Renovation bubble as well, speculators would buy a house for 100, sink 20 on new sinks and such, and sell it for 200, and a greater fool would come along to take the property along with the renovation. And hence the sullen faces I observe on Core's minions when I think about properties like the Cupola Condo (141 Fifth Avenue).

What's happening in China is fundamentally different, it is infrastructural and capacity centered. Think of a beekeeper putting in beehive frames (empty hexagonal beeswax cells), bees can organically make their own, but when they have this infrastructure they industrialize and fill it with honey or with larvae, the colony grows. China's real estate developers according to Chanos are building the frames, the value here is much more straight forward and the risk of abandonment is low, because they are not filled yet. For Chanos' theory to be correct we'll need to see a flipping scenario develop in China where these frames are bought, hastily filled out and then sold on to the greater foul. I don't see this happening, and I see Chanos loosing...

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