June 4th, 2010
I witnessed first-hand Dubai’s rise and fall.From 2002 when there was nowhere to eat, to 2007 when you couldn’t get across the congested city traffic, to 2009, when it was a ghost town.With all respect to Mr. Chanos’ comments, the current Chinese real estate bubble is not worrying – and it is not Dubai times 1,000.
Jim Chanos, king of shorts and now leading China contrarian, has been asserting that China is a bubble, real estate in particular. My general thinking is “ok?”. Of course Chinese real estate is a bubble. Claiming China is a bubble is like claiming a rocket ship has turbulence. China is developing fixed assets across a continental economy at a rate never before witnessed. There are multiple bubbles all the time. And this is not worrying and it is not Dubai
Dubai’s real estate, unlike China’s, was built on 50% foreign demand.Dubai’s collapse in 2008 was the result of European and Russian homebuyers suddenly going home.50% of Shanghai is not going to move away one month.China has a balance sheet problem.Dubai’s big problem is on its income statement.
China successfully dealt with such a Chanos-described “bubble” just ten years ago.In 1999, Beijing and Shanghai Grade A office buildings had vacancies of 30% and 38%.And in 2002, the state banks had very high non-performing loan ratios.China Construction Bank’s NPL was well over 15%.But by 2005, CCB went public with a non-performing loan ratio reduced to 4%.And in 2006, China was again building and had 80% of the world’s cranes.China knows how to deal with the current bubble.
Chinese real estate needs to be viewed as state capitalism writ large. Today’s high real estate vacancies mean prices are going to fall.NPL’s will increase.And banks and state-owned enterprises will recapitalize through public markets and government support.But the assets and the re-developed cities will remain. State capitalism is doing what it does best – fueling the creation of assets and driving development.This is not Dubai nor is it a sub-prime mortgage type bubble.
Keep in mind, that in the time it will take New York City to re-build the World Trade Center, China will have built 50,000 skyscrapers.Approximately 2 Chicago’s per year for twenty years.
Chinese real estate is massive government directed development. It is inherently turbulent with multiple bubbles occuring all the time. But the people and institutions are well prepared for this. The banks and government are good at managing the turbulence and the population saves and prepares for tought times. Per Nassim Taleb, its not a black swan if you see it coming.