China as an emperor with no clothes?

Most pessimists of a certain economy/economies have their day someday. So, time is ripe for China’s pessimists and they go abuzz saying “Didn’t I I tell you”? All this while those who built their careers over China’s optimism have been shrugged aside. How quickly the tides turn really.

Jim Chanos the China pessimst is one such fugure. In this interview, he calls the country as an emperor with no clothes. It is still not naked but is getting there:

Lynn Parramore: You’ve been skeptical towards China for a long time. What did you see that set off alarm bells?

Jim Chanos: Way back in fall of ‘09 we were looking at why the global mining business was actually doing so well through the teeth of the recession, the crisis of 08-09. I knew intuitively it was because China was a vast source of demand for commodities, but I didn’t know how much until my real estate analysts put some numbers up on the white board. One of them said that as of the summer of 09, China had 5.6 billion square meters of real estate under development, both approved and pending. He said half of that was apartment buildings and half of it was commercial and mixed-use. I said, wait a minute — you’ve got the decimal point wrong because 5.6 billion square meters is 60 billion square feet. And it can’t be. He looked at me and checked the numbers a few times and said, “It’s 5.6 billion square meters.”

That was the “ah-ha” moment. If half of that was office and mixed commercial space, — 30 billion square feet out of the 60 — and China has 1.2 -1.3 billion people, then you’ve got a 5’ x 5’ office cubicle for every man, woman, and child in the country! That’s all been built, by the way. I think the latest number on that time series shows 10.6 billion meters currently under development.

It hit me as to just how vast the real estate build-out was. It was as if they had combined our commercial real estate bubble of the late 80s with our residential bubble of the millennium. Only they were doing it all at the same time. As we began to dig deeper into the numbers, we saw that their physical investments as a percentage of GDP was 50 percent. What they were doing was just stunning. They were literally building a whole country in a matter of years.

Now, when you do that, just by the nature of the accounting identity, you can control your growth. You can almost make it whatever you want as long as you have willing capital and lending ability to finance it. That’s why I always joke that China is the only industrialized country that knows its annual GDP on Jan. 1 st of that year. Because it’s planned. You can truly manufacture your growth. Now, you may end up with lots of white elephants and a banking system with lots of bad loans, and that’s the problem, whether you’re a closed system or an open system or somewhere in between (which is what I believe): a closed system with lots of leakage. At the end of the day, other countries have tried this model and it doesn’t really work that well. The Soviet Union and Japan, to some extent, in the late 80s, followed this model.

If you do dumb economic things, whether you’re capitalist, communist, or some hybrid, you ultimately pay the price.

Dumb economic things? It all depends on the cycle one is in. If on an upswing the same things are termed as smart things..


One Response to “China as an emperor with no clothes?”

  1. Anil Says:

    Reblogged this on My Notes on Economics and commented:
    If we read it we might conclude that why the world did not see it.
    Was this time different.
    True now bears of China are having ball time and Ï told you!!!!!!!!!!!!!!” moment. But the real worry is if China do get into tailspin it is going to be too big an event. And after long moderation, we would have a long period of secular stagnation.

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