Is China a Bubble?

Hedge fund manager Jim Chanos (among others, including Nouriel Roubini) says that China is a giant wreck due a hard landing.

From Zero Hedge:

On the Chinese government’s balance sheet:

“The Chinese government’s balance sheet directly does not have a lot of debt. The state-owned enterprises of the local governments and all the other ancillary borrowing vehicles have lots of debt and its growing at a very fast rate. The assumption is that the state stands behind all this debt. We see that the debt in China, implicitly backed by the Chinese government, probably has gone from about 100% of GDP to about 200% of GDP recently. Those are numbers that are staggering. Those are European kind of numbers if not worse.”

On how a Chinese property bubble will play out:

“I think that will be the surprise going into this year, and into 2012 – that it is not so strong. The property market is hitting the wall right now and things are decelerating. The CEO of Komatsu said last week that he is having trouble getting paid for his excavator sales in China. Developers are being squeezed. They’re turning to the black market for lending, this shadow banking system that is growing by leaps and bounds like everything in China.

“Regulators over there are really trying to get their hands around the problem. In the meantime, local governments have every incentive to just keep the game going. So they will continue with these projects, continuing to borrow as the central government tries to rein it in.”

Chanos on his long and short positions:

“We are short Chinese banks, the property developers, commodity companies that sell into China, anything related to property there is still a short.”

“We are long the Macau casinos. It’s our long corruption, short property play. We feel that there’s American management and American accounting. They are growing at a faster rate even than the property developers.”

On the IMF lowering growth estimates for China:

“A lot of people are assuming that half of all new loans in China are going to go bad. In fact, the Chinese government even said that last year relating to the local governments. If we assume that China will grow total credit this year between 30% to 40% of GDP, and half of that debt will go bad, that is 15% to 20%. Say the recoveries on that are 50%. That means that China, on an after write off basis, may not be growing at all. It may be having to simply write off some of this stuff in the future so its 9% growth may be zero.”


Is he right?

Absolutely not.

China has a property bubble, resulting from excess supply. It is also the world’s greatest industrial behemoth, controlling the world’s supply chains in many key components, and is becoming an increasingly powerful player in energy markets thanks to its buy-out of Venezuela and its close ties to authoritarian Eurasian energy powers like Russia, Iran and Pakistan. This means that it’s probably not the best place for Westerners to park capital in the short term. But it has no bearing on China’s strategic standing in the medium to long term.

A comparison with America is inevitable. The United States destroyed its industrial productive capacity, has a zombified financial system , a stagnating labour market, stagnating infrastructure, a clueless establishment, and its currency is about to lose global reserve currency status.

Every day, America becomes more dependent on foreign oil and resources.

America needs the global resource and trade infrastructureThat’s why America is in Iraq, Afghanistan, Yemen, Pakistan. That’s why there are hundreds of bases around the world and why America spends trillions policing the world.

The counter-argument I often hear is “but America has nukes, America can order other countries to do things and they will do it”. But ever since mutually-assured destruction that hasn’t been true.

If you don’t control your supply chains, you have a geostrategic problem. China grasped the importance of supply chains, and through cunning use of long-term planning has made itself the spider at the centre of the web of global trade. America grasped they could get a free lunch with US treasuries and that free lunch destroyed their productive capacity.

China has a cold. America has congential haemerrhoids, restless legs syndrome, diabetes, and autism.

9 thoughts on “Is China a Bubble?

  1. hi man I like reading your blog and find myself agreeing with you more than not. in this instance you are just wrong however. you can’t forget that the US had a far worse great depression then the UK did, even as the UK actually did lose reserve currency status and suffered its own huge financial crisis post Credit Anstalt. the US then, like china now, had built out all this productive capacity for a growing world that didn’t exist. and because the US had been so successful then, like china now, credit growth had been high due to high optimism that the future was owned by the US. the collapse was legendary. however the record shows that the future did INDEED belong to the US. it was the american century. only after a circuitious route worthy of the oracle of delphi did the US reach its potential to own the century. after a 90% decline in our stock market, after 35% nonfarm unemployment, the future was indeed ours. so maybe the future now is China’s too. but drawing straight lines between here and there is a huge huge mistake. and so far your commentary has been too intelligent to so easily miss this. china is a big factory and if the west doesn’t buy their crap all they make is inventory. what you are far more likely to see is a strong dollar on a big global derisking, rising instability in china, and a panicked DEvaluation of the renimbi vs the rising dollar in a failing bid to keep employment high as markets shrink. anyway my 2 cents. its time to expect the unexpected. thanks for your good work. hope you keep it up, LJ

    • Hi there & thanks for reading.

      China is a big factory and if the west doesn’t buy their crap all they make is inventory.

      There is upwards of $4 trillion in China. Why do they even need to send goods to the West when they can recycle their dollar hoard on consumption?

      The US then, like china now, had built out all this productive capacity for a growing world that didn’t exist. And because the US had been so successful then, like china now, credit growth had been high due to high optimism that the future was owned by the US. The collapse was legendary.

      Only after a circuitious route worthy of the Oracle of Delphi did the US reach its potential to own the century. after a 90% decline in our stock market, after 35% nonfarm unemployment, the future was indeed ours.

      Market economies sometimes suffer from high redundancy. The recovery from the 1926 stock market crash was relatively jobless, and when 1929 hit, the debt-deflation, bank failures, contraction of credit, and contraction of demand created huge redundancy.

      What you’re missing is China is not exactly a market economy. Redundancy will be met with swift action by central planners. Now central planning invariably leads to capital misallocation, but judging by China’s recent track record, they will do enough to create the necessary demand to keep things ticking over in spite of significant capital misallocation. One idea to fight off a decline from the bursting property bubble could be loaning/handing out dollars (as opposed to reinvesting them in US treasuries) to businesses and local governments to boost domestic consumption. Another idea might be to offer dollar grants to educated/ skilled/ semi-skilled workers from Beijing and Shanghai to move to empty homes in places like Ordos.

      What you are far more likely to see is a strong dollar on a big global derisking

      I expect to see growing strength in dollars and treasuries through the next solvency/liquidity crises stemming from Greece’s default. I expect to see this falter as more investors, institutions and sovereigns come to realise that negative real rates, alongside a real prospect of US default/ default by debasement are diminishing dollar purchasing power in spite of high demand for dollars.

      The real winner from the next crisis will be gold.

  2. Aziz,

    I am off to China soon, so I will investigate and get back. I am going to buy PUT Options on Australian SPI Futures if my suspicions of the shadow banking blow up is true. Australia is heavily geared towards the commodity story.

    If my gamble does not pay off I will become a born again Christian and give up al possession, as it is easier for a Camel to pass through the eye of a needle, than a rich man to go to heaven.

    If I become fabously rich I will shout you a beer and we’ll enjoy heaven on earth.

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