Wednesday, January 19, 2011

China bubble close to bursting?

Jim Chanosthe master of short selling, is shorting China since early 2010 with the anticipation that it is in a bubble state and close to bursting. This is contrary to many people who bets on China to lift the world out of recession. For example Jim Rogers, a famous investor who now lives in Singapore challenged this view:
“I find it interesting that people who couldn’t spell China 10 years ago are now experts on China,” said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. “China is not in a bubble.”
Jim Rogers is obviously China bullish but being in Asia he may well be biased about Asia's near future, as Business Insiders phrase correctly:
"Seeing as Jim Rogers has literally gone all-in on East Asia -- moving his family there -- we can see why he'd be sensitive on this one."
All these discussions were a year ago. China bubble 2010 burst did not happen. But since than shorting China was one of Chanos’ favorite investments in 2010 reports Insider Monkey:
Chanos didn’t explain how specifically he shorts China but he hinted at shorting companies and industries that are benefitting from China’s real estate bubble. Recently Jim Chanos raised $20 Million for an offshore hedge fund that would probably place short bets against China’s property bubble. When economists like Nouriel Roubini make contrarion and pessimistic predictions, we don’t really pay any attention. They have no skin in the game. ... We don’t pay attention to contrarion economists’ predictions but we do pay attention to a multi-billion dollar hedge fund’s predictions. If Chanos’ predictions are wrong, he would lose millions of dollars. 
 According to an article in The Telegraph published today, Chanos is not alone. Other Hedge funds also bet China is a bubble close to bursting (maybe China bubble 2011 burst):
The manager, who wanted to remain anonymous, said: “The Chinese delegation has said all week that there will be double-digit growth for years to come and the Brits have lapped it up. But the data doesn’t add up. We think we’ve experienced credit bubbles over the past few years, but China is the biggest. And yet the global economy is looking to China as not just a crutch but a springboard out of the recession. It’s crazy.”
Still, Andy Rothman, a China macro strategist at CLSA Asia-Pacific Markets does not agree. Rothman notes that "the real estate market in China is not a bubble, since household incomes are increasing in line with home prices":
Mr. Rothman said that home prices in China's second-tier cities, where most urban Chinese live, are 75 percent lower compared to larger cities like Shanghai and Beijing and prices are increasing at a slower pace.
"With leverage this low and with house prices rising in line with income, these are not bubbles," said Mr. Rothman.
I agree that China is artifically fuelling its current growth by pouring public money into infrastructure projects, but they are using saved money so they won't easily go into crisis or bubble. Also household debt structure of Chinese household is significantly different than the western household. As you can see from the graph below, Chinese household savings level is the highest while debt level is among the lowest. Although Chinese middle class is larger than the total population of US, there are significantly less credit cards in circulation in China. As states "As a result of the low penetration rate of credit cards and culture, it is unlikely that increased spending will come from borrowed funds. Instead higher domestic spending will have to come from household savings or incomes."

  Household Debt Saving - Source: Top foreign stock

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