Hi everyone,

Let's discuss in this thread the possible Chinese real estate bubble that has been around the news for the last year.

What's your opinion on it and what is your position?

Personally, I still cannot say if I am bearish or bullish, but I would say that as time passes I am going more bearish.

The arguments are good on both sides of the fence.

Two of the most prominent people that go bearish on China's real estate are

Nouriel Roubini (Roubini Global Economics) who was one of the first pinpoint the US housing bubble in 2004 and was seen by many people as an apocalyptic prophet.

James Chanos (Kynikos Associates) who was the first to pinpoint the problems with Enron and one of the best short selling hedge fund managers in the world, who has pretty much made his fortune on short selling.

At the same time unlike the US government that was keeping a blind eye while the US property prices were skyrocketing, the Chinese government seems to be taking measures to counter a possible bubble. But is this going to be enough? The Q1 CPI is up 5.4% y/y due to soaring food and mainly due to housing costs. There are said to be more than 64 million unsold condos in China. which would make the US housing crisis look like a joke.

What do you guys think?

Bearish

It's got a clear problem, both economically and socially. How will it play out though is anybody's guess. What statistics we get, we can't really trust and it's hard to gauge the situation due to China's highly reticent nature.

But as you said, the Chinese party have atleast identied the issue and are acting (rather heavy-handedly I might add) to cool the heat down before it boils over. Ironically though, if there is already a bubble that has formed, the party's action's to curb a bubble may in fact cause the "burst".

I heard new apartments in Beijing just this month took about a 20% haircut, ouch!

yes well according to some figures there are about 64 mil apartments that don't register any power usage and therefore can be assumed to be empty.

Shanghai now has a one new house policy which is aimed at curbing this hording/speculative behavior. If the bubble was to burst, house prices would be lowered allowing many Chinese families to finally own their own home!!! This is not a bad thing at all!!

For Australia however, our confidence in iron ore will get a real beating. 40% of the iron ore bought by China is used to build houses for people to live in :O. Aus could see the end to the 'mining boom' and our currency will fall dramatically. Miners will lose jobs and start complaining!!!!!!!!!.......like they did during the financial crisis.

About data and news? I would see what the government does, ie their actions, if there is a problem, we will be able to see through it by their policy changes. At the end of the day, the Chinese gov wants to retain power and keep social harmony, two very important concepts we keep on hearing from them. Many western publications, including the ones from Australia have failed many times at pin pointing the bubble and the burst. This issue has been around for many years according to the West and yet it still haven't happened yet. Its actually the one house policy and the interest rate increases by the government which is telling us that the problem exists!!!

yes well according to some figures there are about 64 mil apartments that don't register any power usage and therefore can be assumed to be empty.

Shanghai now has a one new house policy which is aimed at curbing this hording/speculative behavior. If the bubble was to burst, house prices would be lowered allowing many Chinese families to finally own their own home!!! This is not a bad thing at all!!

For Australia however, our confidence in iron ore will get a real beating. 40% of the iron ore bought by China is used to build houses for people to live in :O. Aus could see the end to the 'mining boom' and our currency will fall dramatically. Miners will lose jobs and start complaining!!!!!!!!!.......like they did during the financial crisis.

About data and news? I would see what the government does, ie their actions, if there is a problem, we will be able to see through it by their policy changes. At the end of the day, the Chinese gov wants to retain power and keep social harmony, two very important concepts we keep on hearing from them. Many western publications, including the ones from Australia have failed many times at pin pointing the bubble and the burst. This issue has been around for many years according to the West and yet it still haven't happened yet. Its actually the one house policy and the interest rate increases by the government which is telling us that the problem exists!!!

I read that there is a pretty big housing bubble in Australia and truly the only reason why it hasn't blown up yet is due to the country's mining industry that has kept it, but if the demand of raw materials in China goes down falling a collapse of their property market then the Australian market is going down the drain as well.

Here is a good discussion from Bloomberg between James Chanos - Kynikos Associates LP (Bearish) and Stephen Roach - Morgan Stanley Asia (Bullish)

You choose

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also he is a video that got out not too long ago about the potential bubble made by an DatelineSBS

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A comparaison of the arguments on both sides

China Real Estate Bubble: Bulls vs. Bears

The New York Times has a debate on the China real estate bubble (or the existence of it), with 10 academics debating on this (Albert Park, Loren Brandt, C. Cindy Fan, Michael Pettis, Yasheng Huang, Vikram Mansharumani, Yongheng Deng, Simon Johnson, Victor Shih, Desmond Lachman). There are not many things new, in my view: bulls are repeating the same old bullish reasons, while the bears continued to be… well, bearish.

Bullish reasoning includes Albert Park, who wrote:

Leaders at all levels strive to maintain high rates of economic growth, and therefore are unwilling to see the housing and construction sectors falter. This gives speculators greater confidence that prices will not be allowed to fall

And because of the urbanisation process…

Temporary periods of excess housing supply, as we see now, thus will soon be overtaken by rising demand

More Cautious ones includes Michael Pettis. Although acknowledging the bubble, he added that:

China’s financial system may not be very good at allocating capital, but this is in part because the system is designed to allow authorities to maintain stability. For that reason we should discount the likelihood of a fall in prices leading to foreclosures and sales, which themselves can cause prices to collapse.

More pessimistic ones include Vikram Mansharumani and Yasheng Huang. In particular, Yasheng Huang wrote:

Although the data are not complete, it is believed that Chinese developers have an extraordinarily high debt level. It would not take a huge price decrease to land them in trouble. I think this is the most likely scenario for how China could get itself in trouble should a price correction, even of modest size, occurs.

The most interesting one is from Simon Johnson, who wrote that government officials in China were pretty much like bankers who blew up the financial system because the incentive system in place was flawed:

The bigger problem, however, is not the banks, it’s the government officials. Chinese bureaucrats are promoted primarily on the basis of the economic growth they deliver in their respective jurisdictions. None of these performance measures are properly risk-adjusted, so the temptation for any given official is to take on a great deal of risk, for example, by encouraging more local land and building deals, and hope that any downside (like a big crash) happens after he or she has been promoted.

http://www.alsosprachanalyst.com/real-estate/china-real-estate-bubble-bulls-vs-bears.html

What does Li Ka-Shing think about it. He is quite bullish. Says that there might be a short term correction, but in the long term it will be fine.

Mulling a Play by Superman

Billionaire Li Ka-Shing has packaged some Beijing holdings into a new REIT, Hui Xian, with both currency and real-estate plays. What's the outlook?

Hong Kong property billionaire Li Ka-Shing has been dubbed Superman for his daredevil feats of turning seemingly dud investments into gold. He is also known for an incredible sense of timing—pouncing on bargains at the bottom of the cycle and selling, trimming his stakes or raising cash for his firms just as a bull market is maturing. So last week when he packaged his Beijing retail, office, hotel and residential complex, Oriental Plaza, into a real-estate investment trust, Hui Xian REIT (ticker: 87001.Hong Kong), and raised US$1.6 billion, there were bound to be raised eyebrows. Was Li seeing something that others were missing? Was the IPO a sign that Asia's savviest investor had sniffed a real-estate bubble in China?

Not quite. If indeed he has sensed anything, it's the start of the new boom—in Chinese yuan-denominated equities. Hui Xian REIT's IPO in Hong Kong is the first offering outside mainland China denominated in yuan. Investors are getting a double play: exposure to prime Beijing real estate at decent yields and a chance to ride on the coattails of the undervalued yuan, which is likely to gradually appreciate against major currencies over the next few years.

The Hui Xian IPO is a key milestone in the development of an offshore yuan market. In recent years, China has moved toward greater use of its currency, one of the world's most tightly controlled, for global trade and some types of finance. Beijing began allowing cross-border-trade yuan settlement in 2009. Chinese banks can settle yuan trades in Hong Kong and are expected to begin doing so in Singapore soon. London is expected to be next international financial center where large Chinese banks will be allowed to settle yuan trades. "Offshore yuan centers are likely to help speed up the eventual process of the Chinese currency's internationalization," notes Aaron Boesky, CEO of Marco Polo Asset Management in Hong Kong.

THOUGH LI RAISED $1.6 BILLION from the sale of near 40% in Hui Xian REIT, investors' response was tepid. While investors were hot on the IPO's "yuan exposure" aspect, they were decidedly lukewarm on the Beijing property exposure. In recent months, Beijing has tried to curb real-estate speculation through a slew of measures including regulating land supply, imposing property taxes, bank lending restrictions and higher interest rates. The measures have made little dent. Average nationwide property prices in 70 major Chinese cities rose 5.2% in March from a year earlier, down from 5.7% year-on-year growth in February.

While China is serious about reining in runaway real-estate prices in major cities like Beijing and Shanghai, where there has been some speculative buying, it doesn't want to destroy real demand for housing in second- and third-tier cities. "The long-term structural trend for China's real estate is up, so long as its economy continues to grow at 8% to 10% per year," says Kevin Gin, a veteran Asian real-estate analyst, now head of Greater China Property Research at Yuanta Securities in Hong Kong. He adds that "1.3 billion people, increasing affluence and more rural-to-urban migration can only mean higher demand for housing and generally higher real-estate prices."

While investors may get their short-term timing wrong, says Gin, those who take a long-term bullish view on Chinese real estate are unlikely to go wrong. "At any given time, some areas may be overpriced or have an element of speculation, but is there is no nationwide real-estate bubble in China."


http://online.barrons.com/article/SB50001424052970203583604576271072780363338.html?mod=googlenews_barrons

And here is Dr. Doom's opinion on the subject.

Beijing's Empty Bullet Trains

by Nouriel Roubini

Is China investing way too much in its infrastructure?

I recently took two trips to China just as the government launched its 12th Five-Year Plan to rebalance the country's long-term growth model. My visits deepened my view that there is a potentially destabilizing contradiction between China's short- and medium-term economic performance.

China's economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible—most likely after 2013—China is poised for a sharp slowdown. Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium.

Despite the rhetoric of the new Five-Year Plan—which, like the previous one, aims to increase the share of consumption in GDP—the path of least resistance is the status quo. The new plan's details reveal continued reliance on investment, including public housing, to support growth, rather than faster currency appreciation, substantial fiscal transfers to households, taxation and/or privatization of state-owned enterprises (SOEs), liberalization of the household registration (hukou) system, or an easing of financial repression.

China has grown for the last few decades on the back of export-led industrialization and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate, and industrial capacity for import-competing and export sectors). When net exports collapsed in 2008-09 from 11 percent of GDP to 5 percent, China's leader reacted by further increasing the fixed-investment share of GDP from 42 percent to 47 percent.

Thus, China did not suffer a severe recession—as occurred in Japan, Germany, and elsewhere in emerging Asia in 2009—only because fixed investment exploded. And the fixed-investment share of GDP has increased further in 2010-2011, to almost 50 percent.

The problem, of course, is that no country can be productive enough to reinvest 50 percent of GDP in new capital stock without eventually facing immense overcapacity and a staggering nonperforming loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

Commercial and high-end residential investment has been excessive, automobile capacity has outstripped even the recent surge in sales, and overcapacity in steel, cement, and other manufacturing sectors is increasing further. In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors.

Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment—including East Asia in the 1990s—have ended with a financial crisis and/or a long period of slow growth. To avoid this fate, China needs to save less, reduce fixed investment, cut net exports as a share of GDP, and boost the share of consumption.

The trouble is that the reasons the Chinese save so much and consume so little are structural. It will take two decades of reforms to change the incentive to overinvest.

Traditional explanations for the high savings rate (lack of a social safety net, limited public services, aging of the population, underdevelopment of consumer finance, etc.) are only part of the puzzle. Chinese consumers do not have a greater propensity to save than Chinese in Hong Kong, Singapore, and Taiwan; they all save about 30 percent of disposable income. The big difference is that the share of China's GDP going to the household sector is below 50 percent, leaving little for consumption.

Several Chinese policies have led to a massive transfer of income from politically weak households to politically powerful companies. A weak currency reduces household purchasing power by making imports expensive, thereby protecting import-competing SOEs and boosting exporters' profits.

Low interest rates on deposits and low lending rates for firms and developers mean that the household sector's massive savings receive negative rates of return, while the real cost of borrowing for SOEs is also negative. This creates a powerful incentive to overinvest and implies enormous redistribution from households to SOEs, most of which would be losing money if they had to borrow at market-equilibrium interest rates. Moreover, labor repression has caused wages to grow much more slowly than productivity.

To ease the constraints on household income, China needs more rapid exchange-rate appreciation, liberalization of interest rates, and a much sharper increase in wage growth. More importantly, China needs either to privatize its SOEs, so that their profits become income for households, or to tax their profits at a far higher rate and transfer the fiscal gains to households. Instead, on top of household savings, the savings—or retained earnings—of the corporate sector, mostly SOEs, tie up another 25 percent of GDP.

But boosting the share of income that goes to the household sector could be hugely disruptive, as it could bankrupt a large number of SOEs, export-oriented firms, and provincial governments, all of which are politically powerful. As a result, China will invest even more under the current Five-Year Plan.

Continuing down the investment-led growth path will exacerbate the visible glut of capacity in manufacturing, real estate, and infrastructure, and thus will intensify the coming economic slowdown once further fixed-investment growth becomes impossible. Until the change of political leadership in 2012-13, China's policymakers may be able to maintain high growth rates, but at a very high foreseeable cost.

http://www.slate.com/id/2291271/

also here is a rebuttal from Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm, and is based in Shanghai.

Why Nouriel Roubini Is Wrong on China's Economy

Famed bearish economist Nouriel Roubini has been making waves for arguing China's economy will suffer a hard landing after 2013. He reasons its 47 percent fixed investment share of GDP, 30 percent savings rates, and low wages will cause a deflationary spiral much like in Japan. Roubini called the recession in America and is no lightweight economist.

However, Roubini is wrong about China because he surprisingly misunderstands basic trends on income, demographics, and investment there.

He argues the mainland has similar savings rates to Hong Kong and Taiwan. Consumers in all three economies save nearly 30 percent of disposable income, so Roubini trots out the cultural argument that Chinese save despite strong safety nets. Nothing can be done to spur consumption according to this reasoning. Digging deeper indicates Roubini needs to take out a bigger shovel and bury old stereotypes.

My firm interviewed 5,000 Chinese in 15 cities last year. It is true consumers over the age of 60 reported savings rates near 60 percent because they feared soaring medical and housing costs. After living through decades of upheaval and missing out on the recent economic boom, they remain thrifty. Little can be done to change decades of ingrained habits.

Our research suggests the key metric Roubini misses is shifts in how younger Chinese spend. Respondents under 32 years old had effective savings rates of zero. They remain confident about their money-making potential. Secretaries earning $600 a month commonly save two month’s salary to buy the latest Apple iPhone or Estee Lauder cosmetics.

Consumer finance reforms are also spurring more consumption for younger Chinese. Total credit cards in circulation rose from 13.5 million in 2005 to 240 million in 2010 and will rise 22 percent annually for five years. More than 80 percent of the 18 million auto sales there last year were paid 100 percent up front. Brands like Toyota and General Motors are starting to push financing options, which will further unlock consumption. The data dispels the myth that Chinese are culturally high savers.

The fixed investment share of GDP of 47 percent is too high as Roubini rightly points out, if it were a long-term strategy. However, fixed investment rose from 42 percent before the financial crisis. In other words, the increase is a short-term stimulus to offset lowered exports due to the world’s malaise. Short-term increases in fixed investment like building railroads and airports are smart strategies to maintain employment rolls and build confidence.

Dangers in fixed investment occur when investments are unproductive, like roads to nowhere in Japan, or continue too long to be sustainable. If rates hover near 50 percent for five years, trouble might emerge. Until then, spending provides a buffer against global economic problems until normalcy in the markets return.

Unlike Japan which built billion dollar roads to prop tiny hamlets of several thousand people, China' spending improves economic efficiency. New rail systems have cut travel time from 11 hours to 5 between Shanghai and Wuhan, increasing productivity for 40 million people. Similarly subways reduce congestion and allow for more affordable housing units to be built.

Roubini also underestimates wage growth. Minimum wages in Sichuan rose 44 percent last year, mirroring double-digit increases elsewhere. Beijing’s municipal authorities even announced multinationals should have minimum wages 1.5 times that of local firms. Wage inflation is so serious that Foxconn, the maker of products from Amazon.com to Intel and Apple, is mulling a $12 billion investment into Brazil as China no longer has a cheap labor pool.

Entrepreneurs often park profits in their companies rather than taking them out as dividends or salaries as corporate taxes are lower. They also charge housing, vehicle and even gym membership fees as business expenses. This is why income is often understated by economists who don’t dig deep enough.

Some argue China top-down political system with its many levers makes it immune from economic cycles. That is not true – while the current political system minimizes risks nothing can prevent the country from ultimately going through rough patches and adhering to the laws of economics.

Short-term, problems are far more likely to emerge due to inflation being exported from America because of Ben Bernanke’s QEII. Longer-term an aging population, over investment in private commercial projects, and a weak education system pose the greatest risks.

The government needs to start addressing these issues by privatizing the education system more, loosening the one-child policy, and sopping up excess liquidity in the commercial real estate sector.

http://www.cnbc.com/id/42639421

China Studies Curbing Developers’ Profits to Fight Bubble, China News Says

China is studying ways to control developers’ profits to keep home prices at a reasonable level, the China News Service reported today, citing the National Development and Reform Commission.

The government is studying real-estate companies’ costs and profitability and plans to apply a 1995 regulation on curbing excess profits to commercial housing, the report said, citing Xu Kunlin, head of the NDRC’s pricing supervision department. The move is part of measures being considered to regulate developers’ pricing practices, the report said.

Premier Wen Jiabao said this month in a cabinet meeting that the country faces challenges including rising property prices in many cities even as real estate transactions shrink. About 40 cities said last month they will cap new home prices below annual economic and disposable per-capita income growth or keep them steady following the central government’s measures to rein in housing values.

“The pressure on the government to tighten property controls keeps rising since there has yet to be a broad, substantial drop in home prices,” said Cui Juan, a Beijing- based analyst at China Minzu Securities Co. “Some projects built on land acquired a few years ago indeed have relatively high profit margins, but margins will surely trend lower going forward as land costs have risen.”

A phone call to NDRC spokesman Li Pumin’s office wasn’t answered.

Slower Gains

Profit at China Vanke Co., the country’s biggest developer by market value, rose 37 percent last year on strong demand for homes, defying government curbs to stem an asset bubble. Evergrande Real Estate Group Ltd., the nation’s second-biggest developer by sales volume, posted a sevenfold increase in 2010 profit.

New home prices in Beijing rose 4.9 percent in March from a year earlier, easing from a 6.8 percent gain in February, the statistics bureau said April 18. Of the 70 cities monitored by the government, 67 cities posted gains, down from 68 in the first two months, the data showed.

The nation may require down payments of 50 percent for first-home purchases if property prices continue to rise, the China Securities Journal reported today, citing an unidentified loan official at a domestic bank. Such a requirement is unlikely in the short term, the Chinese-language newspaper cited the person as saying.

The government has raised the minimum down payment for second-home purchases this year and levied taxes on residences in Shanghai and Chongqing. Beijing and Guangzhou imposed restrictions on housing purchases in February, while the central bank raised interest rates twice this year.

1995 Regulation

The southern Chinese city of Haikou will not ease home purchase restrictions, local news website Hinews.cn reported today, citing Du Haiying, head of Haikou’s housing and urban- rural development bureau, denying a media report that the city may remove such limits. Haikou is considering separating tourism-related properties, such as hotels and hotel-style apartments, from regular homes and not include these properties under the city’s home buying limits, Hinews.cn reported, citing Dai Kaiquan, another official from the housing bureau.

China enacted a regulation in 1995 to curb excessive profits on commodities and services that have “major impact” on the economy and society or have “close ties” with people’s livelihood, according to the report. The nation’s pricing regulator can adjust the items covered.

http://www.bloomberg.com/news/2011-04-27/china-studies-curbing-developers-profits-to-fight-bubble-china-news-says.html

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Local governments are dependent upon development and fixed investments for revenue. There is no property tax and expropriating land (at low compensation), then developing and flipping it at profit is the easiest way for them to raise money.

I read that there is a pretty big housing bubble in Australia and truly the only reason why it hasn't blown up yet is due to the country's mining industry that has kept it, but if the demand of raw materials in China goes down falling a collapse of their property market then the Australian market is going down the drain as well.

Yep, that is right!!! As an Australian I am fed up with the fact that we keep on thinking that it is our hard work which results in this boom. I am even more put off by the fact that people think that there is a limit to the amount of investment China can have in our economy. Having said that, there is still India to pump us back up.

Yeah, Aussie house prices are quite tragic at the moment as well, but people's refusal to build upwards will further push prices up

An analysis of both sides

Akash Prakash: The China debate

Getting China right is one of the most important calls investors have to make. The importance of China is driven by its impact on global growth, incremental consumption of commodities and its emergence as the second-largest economy in the world. If the economic boom in China persists, global economic growth will continue, emerging markets should continue to outperform and global commodity prices will be robust. However, if the bears are right, and we see a huge over-investment-related bust, industrial commodities will collapse, global growth will get a shock and all risk assets may encounter turbulence.

Both sides of the debate seem to agree that China will slow in 2011, and even 2012. Nobody expects China to continue growing at 10 per cent-plus, with expectations converging around 7 to 8 per cent in the foreseeable future. It is being agreed that domestic consumption will increasingly drive this growth. The Chinese government has introduced a slew of measures to raise consumption, such as lowering taxes, improving the social safety net and boosting workers’ disposable incomes.
The bulls believe that China will have a soft landing , exports will hold up and domestic consumption will accelerate — all this will compensate for some weakness in capital spending.

The bears are calling for a hard landing, with a sharp slowdown in capital spending led by real estate and construction in particular. This is the crucial point of difference. China bears are convinced that there has been huge over-investment, poor capital allocation and an asset bubble, while the bulls are far more sanguine. There was a fascinating article on this subject recently in the BCA, some points from which I have tried to encapsulate below.

The bearish case is based on the following:

China’s investment rate is too high, and has been at elevated levels for far too long. Investment in China is running at 47 per cent of GDP, and has been over 40 per cent since 2005. In both Japan and South Korea, the investment rate peaked at about 38 or 39 per cent. It is hard to believe that there has not been a significant misallocation of capital in a country that has been investing so much and where local governments and state-controlled banks are heavily involved in capital allocation decisions. This poor capital allocation will eventually lead to the creation of non-performing assets in the banking system, poor profitability, stranded assets and falling returns on capital.

The second point deals with property prices and the imminent bust in construction activity. Various commentators have pointed out that in real terms, property prices in China are one standard deviation above the mean, even assuming that this mean value is rising over time as incomes increase. The average property price-to-income ratio is already about 10 across China and over 15 in the larger cities. The US housing bubble peaked with this ratio at six. Obviously, the ratio will be higher in China since incomes are rising much faster, but the gap remains excessive. The problem is that people who need to buy cannot afford to do that since first-time buyers are priced out of the market. As far as over-building is concerned, residential floor space under construction in urban China has surged seven-fold in the past decade to over 3 billion square metres. The number of new housing units constructed as a percentage of the number of households in China (over the last 15 years) is much higher than in Japan or the US at any point in their history. China also consumes 50 per cent of the world’s cement. Also, per capita cement consumption in China is now higher than any other nation, despite half of the country’s population living in rural areas. Such cement intensity hints at massive over-building in the cities. Data from BCA also show that investment in residential construction as a share of GDP in China exceeds that of Japan and Korea at the peak of their construction booms.
The bears make the case that as the government is tightening monetary conditions and putting in curbs on speculative property purchases, demand for housing at current price points will drop, just as a huge slug of new supply comes to market. This will force property prices to correct, and private construction activity will contract significantly, hitting growth and commodity prices. Many real estate firms will get into serious trouble and banks will be stuck with dud collateral and assets.

The bulls obviously disagree and make the following case:

As regards over-investment, the incremental capital output ratio (ICOR) in China is not much higher than its Asian peers and does not indicate any gross inefficiency in capital spends. China has also been the biggest recipient of foreign direct investment over the years, indicating that global multinationals are able to earn reasonable returns on capital, unless you assume all these companies have been, and continue to be, irrational. The return on equity in China is reasonable and stable, with no collapse in return ratios. The improvements in infrastructure brought about by this investment are also noticeable and are enhancing productivity in the economy. Just because China invests so much does not imply that it is inefficient.
On the over-build in the housing sector and the imminent bust in construction activity, the bulls totally disagree. They think that data on excess housing units, constructed or under-construction, do not take into account the removal of poor quality housing stock from the system. Even if one assumes that only 1 per cent of the existing housing stock is replaced, the net increase in housing stock over the past decade has barely kept up with household formation. Data on housing prices on a national basis also show that since 1998 – when China implemented housing reforms and privatisation – home prices have lagged household incomes, implying no deterioration in affordability on a nationwide basis. China is still in the middle of its urbanisation process, with half the country’s population still residing in rural areas. All other major economies that rapidly underwent urbanisation experienced a massive boom in residential construction, much like China today. While private construction activity may slow, as rising rates crimp demand in the short term, the government’s desire to build 36 million units of low-cost housing should cushion construction and investment activity. The froth largely exists in the top-end of the market, and is not large enough to impact the broad economy.
It seems if China has a problem it will be short-term and cyclical. Given the type of productivity growth still available to an economy that has 670 million people living in the countryside even today, most of whom will move to manufacturing or service jobs in the cities, it is difficult to see China go into any type of an extended slowdown. The government has enough fiscal levers available to cushion the economy, and domestic consumption still has a long growth runway left. China’s global competitiveness as a production base is still unquestioned.

One hopes that China will slow to cool off commodity prices, which will bring India great relief. But do not bet on any slowdown being significant in either duration or depth.

The author is fund manager and chief executive officer of Amansa Capital

http://www.business-standard.com/india/news/akash-prakashchina-debate/435390/

Chanos on China Stocks, Real Estate - VIDEO - Bloomberg (http://www.bloomberg.com/video/70128022/) (starting at 6:30)