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« Bernanke Feels The Heat: Maiden Lane Asset Disclosure Reveals Truth In Bailout Farce | Main | Bill Moyers & Gretchen Morgenson On Health Care And Financial Reform (Video & Transcript) »

Jim Chanos -- Brilliant Lecture On The China Bubble (Video)

Video:  Chanos on China -- February 2010

Bullet points are inside.

Courtesy of My Investment Analysis

*China is being seen as the savior of Western economies and the future growth engine that will bring back worldwide economic growth.
*This lecture is not a call of an impending/imminent crash in China.
*But there are classic pockets of overheating in the Chinese economy.
*Lots of overcapacity in many sectors.
* We see a lot of double counting in many GDP data points and/or missing or lagging data.
*GDP growth volatility/range is very tight. Numbers are “staggeringly” consistent for a dynamic economy with many things happening.
* Before China, the Western world was worried about the Soviet Union, which was consistently growing at 6-8% (and also had an authoritative government). People thought it was only a matter of time before the Soviet Union overtook the Western world economically.
* At first, expanding economies with authoritative governments usually attain growth through rural-urban migration, development of basic education, and an increasing capital base.
=> Economic growth through the growth of inputs.
=> The problem usually arises when inputs must be used to sustain economic growth.
* Fixed asset investment as a percentage of GDP growth in China has been very large and beyond record levels.
=> People are not taking into account future depreciation of these assets and future maintenance costs.
=> Building office space to be left unused creates problems.
* Local party officials in China typically control real estate property.
*Factories are still being built in China while some factories ‘across the street’ are sitting idle. This increasing overcapacity will add deflationary pressures to the Chinese economy.
* Chinese stimulus has been underestimated because investors usually don’t account for the massive bank lending that has been occurring simultaneously.
* Chinese people are increasingly seeing apartments as a store of value. Wealthy Chinese citizens have been buying 3-4 apartments at a time for this purpose.
=> Reminds of U.S. residential bubble in 2005-2006. People saw housing as the best way in building wealth and storing value.
* Commercial real estate bankruptcy rates are at 16-20% while construction is still out at full force.
=> Companies with idle real estate are also entering into real estate development when they do nothing related to real estate. It’s the get-rich-quick from real estate mentality.
* Around 30 billion square feet of office space is under construction. This means that the Chinese are building a 5×5 feet cubicle for every Chinese citizen (men, women, and child).
=> Given that this is one of the big factors driving GDP, what happens when all the building projects are done?
* Chinese generational savings is being used as a down payment for apartments. Thus, Chinese citizens are tying their savings to possibly overpriced real estate assets.
=> A bubble burst could create social unrest.
* Industrial commodities used in construction have been bid up by China.
* In Western economies, people are usually skeptical about the ability of central planning/governments controlling the economy and being successful at doing so; however, when it comes to China, everyone thinks 9 people in a room can get it right all the time. We don’t think so.



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Reader Comments (16)

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Apr 2, 2010 at 3:05 AM | Registered CommenterDailyBail
Apr 2, 2010 at 3:06 AM | Registered CommenterDailyBail
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Apr 2, 2010 at 3:34 AM | Registered CommenterDailyBail
Check out the Scott Brown editorial. ON CUE, he promises to repeal all the stuff that marginally helps the little people, while keeping things like the insurance purchase mandate. He even praises Romney-care in Massachusetts. What a frigging tool -- but hey, most of us called it this way from the beginning. Mass., you should note, is about to start implementing what are effectively price controls on the insurance companies -- the ripple effects from this are unknown, but they will not be good. And clearly, Romney-care (what a moron, by the way) doesn't do anything about the costs of medical services. NOTHING.

And here we have Scott Brown praising that very system, which is little different from Obama-care.

Get out the tar and feathers. F-you, Scott Brown. You loser.
Apr 2, 2010 at 9:46 AM | Unregistered CommenterJames H
There is NO 'China Bubble'. China simply chose to do things RIGHT and now finds that its prestige, economy and worldwide influence is GROWING as the logical outcome of said policies.

The U.S. on the other hand chose to do things WRONG and now finds that its prestige, economy and worldwide influence is WANING as the logical outcome of said policies.

All this talk & finger-pointing at China is the pot calling the kettle black.
Apr 2, 2010 at 6:40 PM | Unregistered CommenterRecoverylessRecovery
"China simply chose to do things RIGHT?" Really? Big fan of centralized, communist government? Love that thing Castro has going on the little island south of here too?

Look, the US is certainly on a dangerous path, but it is still in the early stages of heading on a path that could, eventually lead to a scenario like China. Don't mistake the two.

If you're smart, you are paying very close attention to the potential economic collapse for an economy that has no experience with such a thing. There is an insane amount of money to be gained and lost. And most will be on the side of the latter.
Apr 2, 2010 at 11:25 PM | Unregistered CommenterOberron4life
"China simply chose to do things RIGHT?" Really? Big fan of centralized, communist government?"

Not at all Ob4L, but I'd dare say that I 'm a big of fan of doing WHAT'S RIGHT. And CHina is undoubtedly doing what's right in order to succeed.

And I hope that the IRONY of witnessing communist China exhibiting a much BETTER UNDERSTANDING & INTERPRETATION of capitalism than the U.S. itself, isn't COMPLETELY wasted on you.

The wisdom of THRIFT, of saving for a rainy day, of living within one's means; these are all ancient BIBLICAL VALUES, NOT just some crazy ideology taken from Mao's Little Red Book. These people have been around for THOUSANDS of years more than us. They've already TIME-TESTED certain values and policies thru trial and error. They've fielded entire schools of philosophy and scientific thought while most of the rest of humanity was -at least metaphorically speaking- still rubbing two twigs together in an effort to start a fire.

Notice how their very interpretation of communism itself has morphed into the much softer version that we see today. These people are constantly EVOLVING while in the meantime we ourselves have DEVOLVED capitalism into something more akin to Venezuelan socialism mixed with Argentinian Clusterfuckacracy. .
Apr 3, 2010 at 4:28 AM | Unregistered CommenterRecoverylessRecovery
RBS warns that the Communist Party will have to puncture the credit bubble before inflation reaches levels that threaten social stability. This in turn may open a can of worms. China’s problem is that this is happening just as the aging crisis starts to bite. The number of workers will decline in absolute terms within four years. The society will then tip into precipitous demographic decline. Unlike Japan, it will become old before it is has built a cushion of wealth
Mar 4, 2011 at 6:21 AM | Unregistered CommenterPark Homes

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