China bulls may wish to consider the other side of the story as noted by Chanos in China Overbuilding to ‘Hit a Wall’
“Construction is 60-plus percent of GDP, compared to exports of 5,” said Chanos, who is the founder and president of Kynikos Associates.
“The problem is that consumption as a percentage of Chinese economy has declined in the last 10 years, from 40 to 35 percent. It’s all real estate,” he said. After the US, China has the world’s second largest economy.
Chanos said that steel, iron ore, cement and other materials needed for construction will be “under pressure.”
China is building US-priced condos where the average income is $3500 per person.
Margins on Chinese companies are razor thin. If China hikes rates substantially most companies in China will lose money. Chanos thinks they already are. “Every company we have looked at has accounting issues. The lower you get in the story the more interesting it becomes.”
If China implodes, Chanos thinks the US will fare relatively well on the basis “Europe exports more to China than the US, and that South America is dependent on China as are parts of Asia.”
When asked about the sustainability of what China is doing, Chanos commented that a lot of what the state is doing is “misdirected investment” in order to keep nominal growth. At the end of the day, that will come back to haunt them.
Chanos mentioned Adam Smith a couple of times in the interview. Adam Smith is author of The Wealth of Nations.
“Adam Smith will get his revenge in China’s real estate market. It is very difficult to manage these kinds of bubbles.”
I happen to agree with Chanos on all counts, adding that an implosion in China, or even a significant slowdown would be beneficial to the US dollar. For additional discussion of the US dollar please see Williams Calls for “Great Hyperinflationary Great Depression”; A Very Easy Rebuttal
Mike “Mish” Shedlock
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