China’s ‘epic’ property bubble about to burst

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Notoriously bearish on China, Kynikos Associates president Jim Chanos is continuing to caution investors to brace for China’s real estate bubble to burst.

The hedge fund manager also sounded the warning bell about the outlook for Chinese inflation.

“We’re bearish on China’s property sector and the credit sector,” Chanos told CNNMoney at the Milken Institute Global Conference in Los Angeles. “This is a country that’s in the middle of an epic property bubble and construction bubble that will end at some point and it won’t be pleasant when it ends.”

Home sales began slowing last year, he said. But the problem is construction continues to outpace demand, and that can skew China’s gross domestic product figures.

Is China faking its economic growth?

“In China’s GDP calculations, they don’t look at final sales, they look at production,” said Chanos. “So a condo being built but not sold contributes to GDP.”

China has been the fastest growing emerging market, in terms of GDP. But Chanos said investors haven’t been able to cash in.

“The growth drivers in China have been the wealth that has been accruing to the insiders, to the state-owned enterprise, not to the Western investors,” he said.

To that end, China’s Shanghai Composite stock market has declined 16% over the past year versus the S&P 500’s nearly 3% gain.

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Beyond the GDP, uncertainty about China’s inflationary pressure is causing Chanos some unease as well.

He said if inflation is really 6% or 7% in China — as opposed to just 4% — that would subtract from China’s overall economic growth rate.

“That’s why so many people worry about China hitting stall speed at 4% or 5% growth, which in the West we would love. If you factor in the real inflation, 4% or 5% might not be any growth at all,” Chanos explained.

So what should investors do?

“Be careful investing in China based on GDP,” Chanos said. “And you see it also in warnings from companies like Caterpillar that actually sell construction products. Business is down and disappointing.”

Soft landing or hard landing? “I don’t know,” said Chanos. “All I know is that this continuing model of using construction to drive economic growth is sowing the seeds of its own destruction.”

The best bet, he says, is to stick with the United States.

“We’re pretty optimistic on the U.S.,” said Chanos. “I think it’s the best house in a bad neighbourhood.”

In addition to touting America’s intellectual property rights and patent protection, Chanos said the United States is on the right side of the credit equation.

“If you think of the pig in the python, the U.S. is the pig at the end of the snake, Europe is the pig in the middle of the snake and Asia is about to be eaten by the snake,” Chanos said. “We are through most of our credit issues.”

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Tony Simon

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