Video: Hugh Hendry's Bearish Call on China: Wrong for 2 Years Running

Eric Jackson says while he likes reading the provocative calls of hedge fund manager Hugh Hendry, his bearish call against China has been wrong for 2 years now. Former China bear Marc Faber recently changed his tune and said there was no near-term threat of China imploding.

Thu 01/13/11 08:00 AM EST -- Eric Jackson

Stocks in this video: YUAN | CHINA | USD | MACRO

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China Bear Still Wrong, Still Talking

By Eric Jackson
RealMoney Contributor
1/10/2011 2:30 PM EST
Click here for more stories by Eric Jackson

I like Hugh Hendry. I tend to agree with him more than not. Most importantly, he makes me stop and rethink things. The 41-year-old U.K.-based hedge fund manager is one of the most colorful in the industry. He's a frequent guest on British television, and he's the kind of guest that producers keep asking back, because he's always entertaining and prone to attack panel guests who disagree with him.

Hendry is currently promoting one of his Eclectica Asset Management LLP's bets that China is about to collapse. An interestingBloomberg article ran over the weekend that summarizes his views.

Here's Hendry's argument in a nutshell: A real estate bubble will collapse soon in China and take the economy down with it. When the bubble bursts, so will China's stock market, and this jolt will be so great for the rest of the world that global markets will crash, causing an immediate drop in local demand for Chinese exports. Such a decline in demand will be more than even the Chinese government can stimulate its way out of. Therefore, the Chinese economy will finally join the world economy with its own downturn and period of deflation.

Hendry has been pushing this forecast for China for at least two years. And to date, it's been exactly wrong. Not even half-wrong. It's not as if he said China would crash and the country went from white-hot growth to tepid growth. Hendry could have taken that as a partial victory of sorts. But no, China has gone from white-hot growth to a four-month pause post-Lehman, back to white-hot growth.

Investors can double down on their bets as much as they want, but I object to people (hedge-fund managers and pundits alike) pushing the same argument publicly without acknowledging that they've been dead wrong for two years running.

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Notes From the Ground in China, Part III

By Eric Jackson
RealMoney Contributor
11/1/2010 11:15 AM EDT
Click here for more stories by Eric Jackson

I've been in China for the last 10 days, and I've been tweeting out pictures and comments all along the way. If you're interested, please check out this Flickr group to see some.

I've been surprised at how many people have sent tweets or messages to me in response to my updates. U.S. investors are obviously very interested in China. Some are very bullish on the country and its equities, while others are very nervous and believe the country's economy is about to fall off the cliff. I want to respond to some of the criticisms I've heard and respond to them on the basis of my on-the-ground experiences in the country.

First of all, a disclosure: Anyone who has read some of my articles will know that I'm bullish for the short and long term on China. I don't consider myself a Pollyanna. I would like to think I'm a realist. There certainly are risks to the country's future growth. However, I don't think the risks I see match up with the ones most commonly expressed by Jim Chanos orThe New York Times.

• Concern No. 1: China has a housing bubble that's going to explode.

This concern has been out there for almost a year and was probably started by hedge fund manager Jim Chanos. Even he admits that this is likely only a bubble relevant to China's "coastal cities," which are experiencing the most growth (Shanghai and Shenzhen, but Beijing must be included as well, being the capital and such an important place for government and commerce). The Chinese government enacted restrictions earlier this summer to cool down speculation in the hot markets (although lower-tier cities had the freedom not to enact the new rules and haven't). There is certainly evidence that the quantity of transactions in these cities dropped immediately after the new rules were implemented, but the prices in major cities have stayed up.

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Construction Craze: China Watch

NEW YORK (TheStreet) -- TheStreet.com Contributor Eric Jackson breaks down Jim Chanos' remarks that China's GDP levels are based on construction and offers his insight on whether China is a bubble based on construction and loan trends and what investors need to know.

Mon 05/10/10 06:00 AM EST -- Brittany Umar

Stocks in this video: ONP | ABB | PH | CNH | UTX | DE | CAT |ITW

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Chanos' China Correction Overstated

By Eric Jackson, Senior Contributor04/14/10 - 06:00 AM EDT

NEW YORK (TheStreet) -- Jim Chanos has been saying since last November that China is experiencing a property bubble.

On Monday night, he went on Charlie Rose with more colorful phrases about why China's property market will crumble by the end of 2010, saying "they're on a treadmill to hell." Chanos went so far as to suggest that the renminbi will actually decrease in value over the next couple of years because of soured real estate loans.

I disagree with Chanos' "hard landing" view on China. At worst, I think the current property boom might result in a 30% correction in which the government is forced to help banks and Urban Development Investment Corporations get bailed out. They have the fiscal strength to easily do that and allow China's economy to continue to grow.

Let's separate Chanos' rhetoric from the facts.

Chanos claim: China's GDP is 50%-60% based on construction that is not sustainable. Chanos argues that China is addicted to property development like a drug addict to heroin. Because China's national and local governments depend on revenue from this growth, he says they will keep developing. This will, in turn, lead to bad loans for projects that aren't needed. Chanos notes that there is currently a project on the outskirts of Beijing "replete with 32 Broadway theaters." He draws a parallel between this one anecdotal project and excessive property development that occurred in Miami in 2005 and Dubai in 2007.

Rebuttal:

We know that China's GDP was 53% construction-related in 2005. If we accept Chanos' current number, construction activity has not changed as a component of China's overall economy in five years. It's flat -- even after the financial collapse of 2008 and the Chinese government's $600 billion (which some same may in fact be more like $1.2 trillion when you add in local government contributions) stimulus package that brought about what Chanos says is now a bubble. If Chanos' view is correct that rampant property speculation and silly (e.g., "indoor ski resorts") construction has increased because of a "Dubai times 1,000" bubble going on, wouldn't it follow that construction as a percentage of Chinese GDP has increased in the last 18 months compared to the middle part of last decade? It has not.

Is "construction" bad? Chanos believes having so much of the Chinese economy devoted to construction -- at least, by Western standards -- is terrible. But "construction" isn't limited to expensive luxury Shanghai condos that a farmer in Xi'an province can't afford. "Construction" is roads, railways, airports, sewers, high-end housing, low-end housing,commercial real estate, office buildings, distribution centers, manufacturing plants, etc. Is income "bad" that is derived by workers building these projects, or by local governments benefitting from increased tax revenue, or by farmers who sell their land for it to be developed into a large manufacturing plant? Of course not. These "construction" projects are laying the foundation for future growth and development for generations. This is not an economy like Dubai built only on real estate and debt. It is built on manufacturing, farming, exports and -- more recently -- internal consumption.

There are certainly expensive real estate projects in China. This is the second largest economy in the world with 1.5 billion people. It would be alarming if they didn't have expensive projects. Canada has the largest indoor water park in the world. What of it? Let's not bolster an argument with a titillating but inconsequential anecdote. Chanos is implying that the only development going on right now in China is expensive residential condos, at the expense of affordable middle-class housing. That's simply not the case. Even in Shanghai and Beijing, according to the Chinese equivalents of Craigslist, there are affordable two-bedroom apartments available at approximately 25 %-35% of an average couple's income.

Chanos claim: From the Rose interview, when asked what makes China a bubble, Chanos said, "We define as a bubble ... any kind of debt-fueled asset inflation where the cash flow generated by the asset itself -- a rental property, office building, condo -- does not cover the debt incurred to buy the asset. So you depend on a greater fool, if you will, to come in and buy at a higher price."

Rebuttal:Property prices have increased in China. In some cities, housing prices doubled from 2003 to 2007 and have doubled again since then. That's rapid acceleration, but there's no evidence to suggest the appreciation was fueled by debt. There's much more Chinese "skin in the game" in terms of cash down payment on primary or investment properties. Surely, there are many average workers now who are watching the price increases and believe they must buy now to avoid paying more for housing later. That is a sign that the market could and probably will correct. But, without the debt fueling the price increases (at least in the residential market), this is neither Miami nor Dubai and -- in my opinion -- suggests a soft landing, not a hard one.

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[This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.]

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China Is Not in a Property Bubble

By Eric Jackson, Senior Contributor

04/07/10 - 07:00 AM EDT

Last week, I presented the case for why China is not in a property bubble.

In doing so, I disagreed with Jim Chanos' view on the subject and presented my arguments, based on my recent visit, which included interviews with Chinese professionals operating over there, and the statistics we have available to us.

There have been a few strong reactions to the article. I followed up with Chanos, saying that I obviously disagreed with him on this issue but that I otherwise respected and admired his work. I asked if he wanted to discuss our differing views on China either on or off the record. He didn't and has since declined an invitation to expressed his views for this article.

Chanos' argument -- and he's not alone in his thinking -- is that Chinese property prices are out of control, especially in the coastal cities. Almost by definition, his description of what's happening at the moment as a bubble implies a hard landing coming.

He hopes to profit from that hard-landing by shorting the foreign companies directly benefiting from the current property boom. This would include names from cement (like Cemex(CX) and Lafarge), iron ore (likeVale(VALE), Rio Tinto(RTP), and BHP-Billiton(BHP), copper (likeSouthern Copper(SCCO), and Freeport McMoran(FCX), and oil companies (although Chanos hasn't disclosed any specific names he's shorted). It would also include foreign-based property companies with exposure to China, such as many Hong Kong-listed developers.

My counter-view didn't dispute that Chinese property prices have been rising. Some have said prices in several cities doubled from 2003 to 2007 and they've doubled again since then.

However, there are many factors which differ between what is going on in China now and what happened two years ago in the U.S.

These differences, to my eyes, suggest that prices aren't as out of control as is often is suggested. Furthermore, the Chinese government has tremendous authority to intervene in the markets to ensure a soft landing. Its ability to do that will help the China growth story play on for many years to come.

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[This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.]

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Jim Chanos Is Wrong on China

By Eric Jackson, Senior Contributor

03/31/10 - 06:02 AM EDT

Stock quotes in this article: BACHY.PK , CICHY.PK

BEIJING (TheStreet) -- Short-seller Jim Chanos correctly saw Enron'sproblems before they engulfed the company. He's now making media appearances identifying China as his next short idea, specifically the Chinese commercial and residential property markets.

Chanos famously referred to these markets as "Dubai times 1,000," foreseeing a cascading effect of property developers defaults, non-performing bank loans, bank losses and reduced lending, a pullback in further development and jobs, and a sharp drop in demand for commodities.

Jim Chanos, founder and managing partner of Kynikos Associates.

In short, according to Chanos, China's property market -- supporting the Chinese economy, which is the last engine powering the global economy -- is about to melt down.

He's put his money where his investment thesis is by shorting internationally traded commodity and infrastructure companies and Hong Kong property developers with exposure to China.

According to a New York Times article from January, Chanos only started studying the China market last summer. He has apparently never visited the country and has joked on TV appearances that he will never be able to visit the country now that he's made such bearish pronouncements.

Instead, Chanos -- like a lot of other Western commentators -- bases his views on statistics and the opinions of other Western talking heads, many of whom also haven't been to China lately, if ever.

There's a Chinese saying: "If you visit my village in three months, you'll notice small changes; if you visit my village in six months, you'll notice big changes; if you visit my village in a year, you won't recognize my village." Chanos and other bears haven't even visited the village yet to kick the tires.

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[This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.]

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