China's Low-Income Housing Shortage

By Eric Jackson, Senior Contributor02/09/11 - 06:00 AM EST

NEW YORK (TheStreet) - We often read in Western media about "the Chinese real estate market" as if it was monolithic. But that's as absurd as talking about the U.S. housing market that way.

There are obviously differences between the price of an Upper East Side townhouse and a condo in Miami. Besides geography, there's a huge distinction between the low- and high-end of the market in America today. Just a week ago, Barron's profiled how Florida -- with thousands of foreclosed low-end properties continuing to be dumped onto the market -- was seeing high-end housing in places like Naples and Palm Beach firm and even move up in for some properties.

Business School market segmentation principles apply equally to China as they do here. China's real estate market has as many permutations -- from coastal cities to Tier 3 interior cities, and high-income to low-income -- as we do in America.

All the bluster from the China bears over the past year pointing to a real estate bubble has -- more precisely -- been focused on the upper-middle and high-end of the Chinese residential market in the Tier 1 cities of Beijing, Shanghai, Shenzhen and Guangzhou. Those markets were white hot last year and caused the Chinese government to take swift and draconian action, which almost immediately took effect on slowing things down.

Although I still don't believe that end of the market is expensive by major Western city standards (like New York, London, Moscow or Hong Kong), the bigger opportunity in the Chinese real estate at the moment is in low-income housing (LIH).

Looking at the bigger picture, China's government is motivated by the goal of social harmony in the Chinese society. It knows that if it does not achieve this goal, there will be social unrest and protests. This is the goal behind the "protect 8" policy of maintaining at least an 8% growth rate in the annual GDP.

When housing started to rise at the higher end of the residential market last year, it was a concern not just for being a bubble, which might burst down the road but for causing resentment from people at the low-end of the market who found housing less and less affordable.

.......

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

Sphere: Related Content

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.

........

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

Sphere: Related Content

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.

........

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

Sphere: Related Content