NY Times, January 8, 2010
Contrarian Investor Sees Economic Crash in China
By DAVID BARBOZA
SHANGHAI — James S. Chanos built one of the largest fortunes on
Wall Street by foreseeing the collapse of Enron and other
highflying companies whose stories were too good to be true.
Now Mr. Chanos, a wealthy hedge fund investor, is working to bust
the myth of the biggest conglomerate of all: China Inc.
As most of the world bets on China to help lift the global economy
out of recession, Mr. Chanos is warning that China’s
hyperstimulated economy is headed for a crash, rather than the
sustained boom that most economists predict. Its surging real
estate sector, buoyed by a flood of speculative capital, looks
like “Dubai times 1,000 — or worse,” he frets. He even suspects
that Beijing is cooking its books, faking, among other things, its
eye-popping growth rates of more than 8 percent.
“Bubbles are best identified by credit excesses, not valuation
excesses,” he said in a recent appearance on CNBC. “And there’s no
bigger credit excess than in China.” He is planning a speech later
this month at the University of Oxford to drive home his point.
As America’s pre-eminent short-seller — he bets big money that
companies’ strategies will fail — Mr. Chanos’s narrative runs
counter to the prevailing wisdom on China. Most economists and
governments expect Chinese growth momentum to continue this year,
buoyed by what remains of a $586 billion government stimulus
program that began last year, meant to lift exports and
consumption among Chinese consumers.
Still, betting against China will not be easy. Because foreigners
are restricted from investing in stocks listed inside China, Mr.
Chanos has said he is searching for other ways to make his bets,
including focusing on construction- and infrastructure-related
companies that sell cement, coal, steel and iron ore.
Mr. Chanos, 51, whose hedge fund, Kynikos Associates, based in New
York, has $6 billion under management, is hardly the only skeptic
on China. But he is certainly the most prominent and vocal.
For all his record of prescience — in addition to predicting
Enron’s demise, he also spotted the looming problems of Tyco
International, the Boston Market restaurant chain and, more
recently, home builders and some of the world’s biggest banks —
his detractors say that he knows little or nothing about China or
its economy and that his bearish calls should be ignored.
“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.”
Colleagues acknowledge that Mr. Chanos began studying China’s
economy in earnest only last summer and sent out e-mail messages
seeking expert opinion.
But he is tagging along with the bears, who see mounting evidence
that China’s stimulus package and aggressive bank lending are
creating artificial demand, raising the risk of a wave of
nonperforming loans.
“In China, he seems to see the excesses, to the third and fourth
power, that he’s been tilting against all these decades,” said Jim
Grant, a longtime friend and the editor of Grant’s Interest Rate
Observer, who is also bearish on China. “He homes in on the
excesses of the markets and profits from them. That’s been his
stock and trade.”
Mr. Chanos declined to be interviewed, citing his continuing
research on China. But he has already been spreading the view that
the China miracle is blinding investors to the risk that the
country is producing far too much.
“The Chinese,” he warned in an interview in November with
Politico.com, “are in danger of producing huge quantities of goods
and products that they will be unable to sell.”
In December, he appeared on CNBC to discuss how he had already
begun taking short positions, hoping to profit from a China collapse.
In recent months, a growing number of analysts, and some Chinese
officials, have also warned that asset bubbles might emerge in China.
The nation’s huge stimulus program and record bank lending,
estimated to have doubled last year from 2008, pumped billions of
dollars into the economy, reigniting growth.
But many analysts now say that money, along with huge foreign
inflows of “speculative capital,” has been funneled into the stock
and real estate markets.
A result, they say, has been soaring prices and a resumption of
the building boom that was under way in early 2008 — one that Mr.
Chanos and others have called wasteful and overdone.
“It’s going to be a bust,” said Gordon G. Chang, whose book, “The
Coming Collapse of China” (Random House), warned in 2001 of such a
crash.
Friends and colleagues say Mr. Chanos is comfortable betting
against the crowd — even if that crowd includes the likes of
Warren E. Buffett and Wilbur L. Ross Jr., two other towering
figures of the investment world.
A contrarian by nature, Mr. Chanos researches companies, pores
over public filings to sift out clues to fraud and deceptive
accounting, and then decides whether a stock is overvalued and
ready for a fall. He has a staff of 26 in the firm’s offices in
New York and London, searching for other China-related information.
“His record is impressive,” said Byron R. Wien, vice chairman of
Blackstone Advisory Services. “He’s no fly-by-night charlatan. And
I’m bullish on China.”
Mr. Chanos grew up in Milwaukee, one of three sons born to the
owners of a chain of dry cleaners. At Yale, he was a pre-med
student before switching to economics because of what he described
as a passionate interest in the way markets operate.
His guiding philosophy was discovered in a book called “The
Contrarian Investor,” according to an account of his life in “The
Smartest Guys in the Room,” a book that chronicled Enron’s rise
and downfall.
After college, he went to Wall Street, where he worked at a series
of brokerage houses before starting his own firm in 1985, out of
what he later said was frustration with the way Wall Street
brokers promoted stocks.
At Kynikos Associates, he created a firm focused on betting on
falling stock prices. His theories are summed up in testimony he
gave to the House Committee on Energy and Commerce in 2002, after
the Enron debacle. His firm, he said, looks for companies that
appear to have overstated earnings, like Enron; were victims of a
flawed business plan, like many Internet firms; or have been
engaged in “outright fraud.”
That short-sellers are held in low regard by some on Wall Street,
as well as Main Street, has long troubled him.
Short-sellers were blamed for intensifying market sell-offs in the
fall 2008, before the practice was temporarily banned. Regulators
are now trying to decide whether to restrict the practice.
Mr. Chanos often responds to critics of short-selling by pointing
to the critical role they played in identifying problems at Enron,
Boston Market and other “financial disasters” over the years.
“They are often the ones wearing the white hats when it comes to
looking for and identifying the bad guys,” he has said.
---
http://www.washingtonpost.com/wp-dyn/content/article/2010/01/10/AR2010011002767.html
In China, fear of a real estate bubble
By Steven Mufson
Washington Post Staff Writer
Monday, January 11, 2010; A01
BEIJING -- With property prices soaring in key cities, many
investors and bankers worry that China has the next great real
estate bubble waiting to be popped.
The Chinese government is worried, too. On Sunday, the nation's
cabinet, citing "excessively rising house prices" in some cities,
said it will monitor capital flows to "stop overseas speculative
funds from jeopardizing China's property market." It also said
that any Chinese family buying a second home must make a down
payment of at least 40 percent.
For investors, many of the usual bubble warning signs are
flashing. Fueled by low interest rates, prices in Shanghai and
Beijing doubled in less than four years, then doubled again. Most
Chinese home buyers expect that today's high prices will climb
even higher tomorrow, so they are stretching to pay prices at the
edge of their means or beyond. Brokers say it is common for buyers
to falsely inflate income statements for bank loans.
Some economists and bankers fear that they have read this script
before. In Japan at the end of the 1980s and in the United States
in 2008, residential real estate bubbles ended in big crashes,
battered banks and slow recoveries. With China acting as a key
engine of global growth, a bursting of the Chinese real estate
bubble could be a pop heard round the world.
"It's definitely a bubble," said Beijing real estate broker Xu
Xiangdong, a 24-year-old former nightclub cashier. "But it won't
break because there is lots of support beneath the bubble because
buying power is really strong."
Many economists say there are good reasons for such optimism.
Rapid economic growth, rising family incomes, continued migration
to the cities, pent-up demand for housing, and a banking system
much less exposed to residential mortgages than banks in the
United States or Japan could protect China, they say, from a real
estate meltdown for years to come.
If not, then development firms and Chinese banks might teeter and
construction could slow down, tossing millions of Chinese people
out of work. A real estate bust might also shake confidence here
just when the world is looking to Chinese consumers to start
spending more to bring global trade into better balance.
Arthur Kroeber, a Beijing-based analyst and managing director of
Dragonomics, said China's economy is "not even close" to being a
bubble like those seen in Japan, which endured more than a decade
of sluggish growth after prices retreated, or in the United
States, which helped bring about the current sharp global downturn.
"At some point the music will stop," Kroeber said. But he
predicted that it would not happen in China for at least 15 years,
when urbanization slows.
The bigger real estate problem in China now is access to housing.
For many people -- especially the young or people moving to the
cities from rural areas -- the dream of owning a home is more and
more difficult to attain. The Xinhua news agency quoted Goldman
Sachs as saying that housing price increases had outpaced wage
hikes by 30 percent in Shanghai and 80 percent in Beijing in
recent years.
A popular television soap opera known as "Snail House" depicts two
sisters' desperate struggle to buy an ever more unaffordable home.
One sister resorts to becoming the mistress of a corrupt, married
official to get money for an apartment. Last month, after a
broadcast official said the 33-part series was having a "vulgar
and negative social impact" and using "sex to woo viewers,"
viewers lashed out at him on the Internet and accused him of
owning multiple luxury homes.
Working out of an east Beijing building decorated with Ionic and
Corinthian pedestals, Xu, the real estate broker, has seen
apartment prices in the complex double in the past year, to $380 a
square foot. Prices had already doubled over the three previous
years. Now the sales-agent manager of a Century 21 franchise, his
take-home pay is more than four times what he earned as a cashier.
But Xu, a vocational school graduate and son of corn farmers in
Jilin province, still rents.
Speculation has become common. Wang Zhongwei, a 35-year-old stock
market analyst who owns the apartment where he lives, bought two
apartments in 2004 for investment purposes. He borrowed from
family and friends to meet mortgage payments twice as big as his
take-home pay. But in the middle of last year, he sold the
apartments for twice what he paid and made $145,000, a fortune here.
"It's much easier than working every day to make money," Wang
said. "I work very hard and compete for my so-called career every
day, but I don't make that much money from work." In November, he
bought two more apartments.
The government has helped pump up the property market by keeping
interest rates low, the currency undervalued and the fiscal
spigots open. Standards for bank lending have been lax, with
lending rising at a 30 percent annual pace in 2009, according to a
report by the Los Angeles-based bond investment firm Pimco. Since
the government exerted restraint in July, lending has risen at a
slower, but still brisk, 15 percent annual rate.
Now top leaders are worried. In a year-end interview with the
official Xinhua news agency, Premier Wen Jiabao said that "as the
property market is recovering rapidly this year, housing prices in
some cities are rising too fast, which deserves great attention of
the central government." He vowed to "crack down on illegal moves,
including hoarding of land and delaying sales for bigger profits."
And he said the government would do more to provide affordable
housing.
Last week, the government also nudged a key interest rate higher.
Still, many economists are sanguine.
"One of the legacies of China's prolonged stagnant growth prior to
economic liberalization is an overwhelming shortage of residential
property that meets its new living standards," Koyo Ozeki said in
a report published by Pimco. "It will likely take a considerable
period of time for supply to catch up to demand." That wasn't true
in the Japanese or U.S. bubbles.
Ozeki, an executive vice president for Pimco in Tokyo, noted that
the total credit for the property sector in China has grown to 40
percent of gross domestic product; in the United States, it hit 80
percent in 2007. For Chinese banks, exposure to real estate is
less than 20 percent of assets, much smaller than in the United
States. That should reduce the chances of a banking crisis.
In addition, while property prices are soaring in such areas as
Beijing and Shanghai, price increases are more modest elsewhere.
Government statistics say housing prices nationwide rose only 5.7
percent last year.
Moreover, China's homeowners carry less debt than homeowners
abroad and the economy's rapid growth can probably keep incomes
rising fast enough to cover mortgage costs. Kroeber said that
mortgages issued from 2002 to 2008 equaled only 40 percent of the
value of housing sold nationwide.
Liu Renping, a 30-year-old construction engineer originally from
the countryside of Inner Mongolia, is typical of many first-time
Chinese home buyers. After deciding to get married, he hunted for
four months before buying a two-bedroom, 900-square-foot apartment
on the northern edge of Beijing last March, even though it won't
be completed until this October. He paid $162 per square foot and
took out a mortgage out for half the money needed. The other half
came from his mother, friends and his savings.
About 30 percent of the couple's pay will cover mortgage payments.
"And my salary will increase in the near future. So I don't feel
big pressure from my mortgage," Liu said.
Since he bought the apartment, prices in that development have
jumped more than 50 percent. "I am lucky to have bought it early,"
he said. "If the price was this high when I bought the apartment,
I wouldn't buy at all because it would have been too expensive and
I wouldn't have been able to afford it."
Researcher Zhang Jie contributed to this report.
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