Thursday, July 28, 2011

Property bubbling in China: James Chanos - NDTV

Ten years ago, James Chanos made the first substantial bet that energy giant Enron was on the brink of financial ruin. He proved bang on target. His latest prediction is that the Chinese real estate market is headed towards a similar fate. Mr Chanos is the founder and president of the hedge fund Kynikos, which means ‘cynic’ in Greek. His firm manages roughly $6 billion and specializes in investments against assets that it considers overvalued, which means short selling in the financial lingo.

Here is the complete transcript of Mr Chanos' exclusive interview with NDTV's Prashant Nair.
NDTV: You have been famously shorting 21st century's greatest economic story. Do you still believe that 'China is on a treadmill to hell'?
Mr Chanos: Well, the 21st century is only about one-tenth through. So far, it’s the story of the 21st century. Look, China is a very dynamic country. It’s going to be a great power. It’s been a great power. But that doesn't mean, there can't be some pretty major speed bumps along the way. And I think that we are probably looking at a very very large pot hole -to mix a metaphor in that. China in the past few years is increasingly relying on a property bubble to spur its GDP growth. And I think that's going to be problematic going forward for not only China but possibly countries in the region as well as countries that export to China, particularly industrial commodities.

NDTV: From the time you started calling China's property/construction led GDP boom a big bubble, the government & the central bank has acted. Do you still believe China is a story of 'overheating and overindulgence'?
Mr Chanos: I think that they have tried to tamp down the property growth. But in fact, the fixed asset investment as a percent of GDP is actually still increasing ironically. So as much as they try to tamp down the price increases in the property market and try to restrict mortgage availability, it appears to be popping up elsewhere. And much of this is due to the fact that there are two governments in China. There is the central government in Beijing which is desperately trying to cool off inflation and cool off the property market. But then you have the local governments, who are in bed with the developers, and who basically sell land to joint ventures increasingly backed by risky debt as we now know in order to fund these real estate ventures. And I think that's the problem. They are still going, as we say, pedal to the metal. They are going full bore at the local level while the central authorities are trying to restrict the growth out of Beijing.

NDTV: Ok, if we are talking about the debt bomb, when does China's bubble burst? You had called for the unraveling by 2011-end and we are pretty much there. Would you want to put a new timeline?
Mr Chanos: Well, look China has been despite what some of my critics say, China has not been a bad place to be a bear in the last year and a half. The Chinese market over the last year and a half is down. The property developers and banks, which we were primarily short, are down. Most western markets with the exception of Spain and a few others are up over that time frame. Certainly the S&P 500 is. So if you are a bear China has not been a bad place to be hanging out for the past 18 months. I want to clarify that. Second of all, a year and a half ago people pooh poohed the fact that there was even a property bubble. I mean, there was...I was attacked for not speaking Mandarin...for never having been to the mainland. And as I pointed out, no length of residency or number of visas can compensate for a lack of judgement. There were plenty of Miami natives who lived in Florida their whole lives, who lost everything in the Florida real estate bubble bursting. So, I think again a lot of people attacked me...but not the argument. As 2010 has moved into 2011, I think it’s becoming a little more obvious to the mainstream press that there is a bubble. And the question seems to have shifted, not is there a property bubble, but what do we do about it. And does it deflate gently or does it pop.
NDTV: Your timing on Enron, Tyco and the subprime crisis has been impeccable. So, do you think in the next ten years or so, we might get to see a big change in the world economic order? If it happens - what do you think we are looking at?
Mr Chanos: The challenge for the Chinese government, as for a lot of developing economies, is to transform from primarily an investment led economy to a consumer led economy. And that is what everybody is counting on. The problem with that argument is that it’s been made for years now and consumption as a percent of China's GDP is declining, not increasing. And so I think they are going to get there but I think there is going to be some pain along the way. And as all great developing economies including the USA in the 19th century and early 20th century, I mean those are histories of booms and busts. It’s often led by capital investment where investors get wiped out and a whole new group of investors come in and the economy continues to progress. And that's my only caution here. China might do very well. But western investors in China might not do very well. As a famous historian quipped to me fairly recently, he said, boy, the only westerners who have got their money out of China were the 19th century opium dealers and they had the Royal Navy behind them. And there is certain truth to that.
NDTV: If the Chinese bubble bursts, how do you think commodity prices will pan out?
Mr Chanos: Well, I would tell your viewers in the iron ore market back in India to lock in whatever they can. I think, for example that industrial commodities it’s no secret that India along with China is probably on the margin the largest driver of demand. And it’s all due to the construction boom. So things like copper, iron ore, to some extent steel, these are all being buoyed by the construction boom in China. And you know what we know about these things historically is that there is no gradual end in demand. The demand just ends and falls off a cliff. And so you know, I think it behooves the commodity makers to try and lock in as much as they can. But you know, will their contract be held unviable. Who knows? As they say, with construction going full bore and the amount of commodity production that is now gearing up to meet that construction, if that ends at some point or even begins to decelerate reasonably well, price drops could be enormous in some of the commodities.

NDTV: Gold is consistently making record highs. Is it the only safe investment in current times? How much of a precious metals bull are you?
Mr Chanos: Well, I notice you said investment and not money, and that was the big controversy last week with Mr Bernanke. No, we don’t have a view on the gold market. That's a monetary phenomenon. And it’s hard to analyse the sentiment. We are doing work on the Chinese property market and deriving our investment ideas on the short side from that, which we can analyse. I can’t really analyse all the factors in gold. I'll leave it up to someone else.