Him again…..Jim Chanos
Source of picture. www.marketfolly.com
By John Richardson
THE Chinese government is playing a perilous game at the moment as it tries to undo damage caused by economic stimulus.
As it grapples with attempting to lower property prices, while not causing a real-estate market collapse, this once again brings to mind famous investor Jim Chanos who said last year:
“We are often derisive towards the ability of governments to do what markets do better.
“When it comes to China, though, everybody is willing to bet that nine guys in a room [the country's top leadership] will get it right all the time. I am willing to bet this is not the case.”
Any economy was bound to suffer from one of the biggest lending binges in economic history. Bank lending was doubled in 2009 to $1.4 trillion to one-third of GDP (gross domestic product), and there was a further $580bn worth of government subsidies for autos and other purchases.
A country as unequal and as corrupt as China was always likely to face major problems.
Back in the dark days of early 2009, the Chinese government felt it had no choice. Literally tens of millions of migrant workers came back from the countryside after the Chinese New Year to discover they were out of work because of the collapse in orders for manufactured goods from the West.
So the lending floodgates were opened leading to another major threat to social stability – a sharp escalation in overall inflation and real estate prices.
As inflation took off, the government realised it had to act again, particularly given the sharp increase in the cost of food. Ninety-six per cent of China’s population earns less than $20 a day. Rising food costs have thus reduced the country’s overall purchasing power much more so than would have been the case in a developed economy.
Rising real estate prices have hurt the “sandwich generation” we referred to earlier this year - those too rich to qualify for government housing, but way-too poor to afford private property.
Interest rates have therefore been raised, along with numerous increases in bank-reserve requirements – the percentage of reserves banks have to set aside against lending.
Specific measures aimed to cool real estate include limiting the number of mortgages for each individual borrower and raising minimum downpayments to 40 per cent.
Beijing has realised that speculation in general, not just in the real estate sector, has to be worked-out of the economy to reduce further misallocation of capital.
When the lending binge was taking place a lot of the money flowed to traders in chemicals, polymers, commodities in general and real estate. The traders were making fat packets themselves, but were of course adding no real value to the economy.
Speculators are being deliberately forced-out of business through denial of access to cheap credit. This has become evident in the polymers sector where traders/converters are being allowed to bust, whereas big-scale converters providing differentiated high-value plastic film are enjoying easier financing.
But taking a sledgehammer to crack a series of nuts has created collateral damage to a great many small and medium-sized enterprises (SMEs) – who do add value.
The SMEs as a whole generate 50 per cent of China’s GDP and 80 per cent of employment and so of late Beijing has tried to ease their financing conditions. As yet, though, the blog’s contacts in China report no significant improvement
Returning to the Jim Chanos comments, what if companies are blithely assuming that everything will be alright in the end – i.e. that Beijing will effectively manage SME financing?
Even if lending becomes a lot easier and cheaper, what is the scale of the existing damage to the SMEs?
To what degree has this damage lowered chemicals and polymers consumption in 2011 – and what about next year?
Getting the balance right in the real estate sector is also a huge challenge.
If China had allowed the property bubble to continue inflating, the resentment of the “sandwich generation” would have grown. These young professionals – with good qualifications and skills – have already been priced-out of home ownership by the “worthless” speculators.
But when bubbles burst they often collapse, hurting average working people who buy into a boom at the tail-end – for example, all those who bought and held property in the States in 2006-07.
The New York Times quotes a 32-year-old Shanghai resident who took part in a demonstration of disgruntled homeowners on October 22. He had bought an 850-square-foot condo for $173,000 only to see remaining units in his building up for sale at $124,000.
Again – how effectively will the government manage this new constituency of angry, under-water homeowners?
How do they ease their plight without re-inflating the real-estate bubble?