China is on “a bigger and faster treadmill” than ever as property sales slow, said Jim Chanos, the hedge-fund manager who’s shorting banking stocks on a bet the market will crash.
“The Chinese are beginning to realize that property prices can go down as well as up and this is going to be a very, very troubling development for the Chinese property market,” Chanos, president and founder of $6 billion hedge fund Kynikos Associates Ltd., said in a Bloomberg Television interview from Singapore with Susan Li today.
Chanos has forecast since at least February 2010 that the property market will slump, saying that China is Dubai times a thousand and on a “treadmill to hell” because of its reliance on real estate for growth. Home prices rose in fewer than half of 70 Chinese cities in a nationwide survey in September as sales eased after the government restricted home sales and imposed curbs on some mortgages in an attempt to cool prices.
The hedge-fund manager’s views are at odds with those of Stephen Roach, non-executive chairman of Morgan Stanley Asia, who said in New York yesterday that the government has had some success in deflating a housing bubble and concerns of a hard landing are “overblown.” Chinese lenders led by Agricultural Bank of China Ltd. rallied today after reporting higher third-quarter profits and lower bad-debt ratios.
China’s “hard landing” has begun, said Chanos, adding that consumption as a percentage of gross domestic product is dropping and that fixed-asset investment is the driver of the Chinese economy. “Most China observers were not talking about any landing three months ago and now they are confidently talking about a soft landing.”
Shares of Chinese banks, insurers and developers, as measured by the MSCI China Financials index, have lost 21 percent in the past year on concern that slowing economic growth will spur bad debts after a three-year credit boom.
Chinese banks, led by Industrial & Commercial Bank of China Ltd., the world’s biggest lender by market value, are set to report record annual profits after third-quarter earnings rose and bad-debt ratios shrank. Net income at ICBC climbed 28 percent from a year earlier to 54.4 billion yuan ($8.5 billion), the Beijing-based bank said yesterday. Bank of Communications Co., China’s fifth-largest lender by assets, posted a 31 percent gain to 12 billion yuan.
‘Grain of Salt’
Chanos said he takes the accounting of the Chinese banks “with a large grain of salt.”
“Western banks reported record profits in 2007 before collapsing,” he said. “It’s all about credit. The last two banking crisis in 1999 and 2004, China banks had 40 percent non-performing loans to total loans and there were no recessions in those periods.”
Chanos, who was one of the first investors to foresee the 2001 collapse of Enron Corp., said his company was shorting homebuilders and credit-related stocks in the West in 2005 to 2007. Shorting involves selling borrowed shares with the view their prices will fall and they can be bought back at a profit.
“All the way down, there were 30 percent and 40 percent rallies from new lows, yet things kept deteriorating,” Chanos said, adding that he’s nowhere near covering his short positions in China as “the property slowdown has just started in the third quarter. Stocks are going to go up and down like yoyos. But we are keeping an eye on the fundamentals and they have just started to deteriorate.”
Property Stocks Climb
The gauge tracking property stocks on the Shanghai Composite Index climbed 3.5 percent at the close, the most in two months.
Real estate transactions in the past two months, in the so-called tier-one, two and three cities the firm tracks are down 40 percent to 60 percent year on year, said Chanos.
“The property slowdown or worse has started,” he said. “The question is how it’s resolved.”
Chanos is on a trip to Asia, including Hong Kong and Singapore. He said trips to visit Shanghai and Beijing are “probably some ways away” because he has analysts going to China all the time.