Jim Chanos on the Australia/China property boom
Posted on 26 November 2010
Let’s be clear – the hedge fund community remains net short Australian banks and some of our major resource stocks. So it’s interesting to hear the rationale for the short China trade from one of the better known hedge fund managers (click here to view the CNN interview with Jim Chanos).
It’s an argument that we’ve been thrashing out with colleagues in the investment community.
In brief:
1) Australia has had a massive terms of trade boost as a result of the Chinese property building boom. This has principally flowed through to the domestic economy through taxes on these commodity exports.
2) The domestic economy has taken these tax receipts (distributed via tax cuts or government handouts) and leveraged them, via low interest rates, into the housing sector.
3) Australian household leverage has pushed to very high levels by most sensible measures. This leaves the economy vulnerable to a terms of trade shock – principally a downturn in Chinese property construction.
4) The transmission mechanisms?
- A wealth effect from lower share market prices – whatever the failings in logic, commodity companies trade in line with movements in spot prices.
- An income effect from declining GDP – if you accept that debt accumulation has peaked, then following the logic that our housing construction sector is built around continued debt driven demand, it is very exposed to stagnation in debt or worse still deleveraging. While housing construction only directly employs 10% of the workforce and comprises 7% of GDP, the multiplier effects through the economy would be significant. This is why governments of all persuasions are so willing to throw taxpayer subsidies towards keeping the sector growing.
- And the most scary – and by no means certain – is that we then enter a house price correction – with the attendant wealth effects that are currently haunting the US.
Conclusion
Australia’s banks not only face the headwinds of regulatory uncertainty but are seen as a leveraged play on the domestic economy. It’s not hard to see the argument for the short side. A sharp slowdown in China, amplified through the financialisation of the commodity sector, will also have a severe impact on the share prices of Australia’s commodity producers. While I’m not a short seller by nature, there are very few reasons to own the major banks or diversified industrial miners in the current market.
6 responses to Jim Chanos on the Australia/China property boom
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Nice one Rohan. I couldn’t agree more. You might be interested in Vitaliy Katsenelson’s discussion on China. In my opinion, it is the best analysis of their situation that I have read – even better than Chanos’.
I have provided a summary of it, as well as some basic analysis (I’ll do a more detailed study down the track) here.
Cheers Leith
Killer post.
Points 1, 2, 3 lay out our predicament succinctly and unambiguously.
Good to see more of this type of analysis. Christopher Joye, meanwhile, continues to spruik his Hedonic measure of house demand and say that prices are only 4.6 times income. And later today we’ll get more spruiking from the HIA that supply is still tight despite flat or falling sales. Blah blah blah.
Thanks for the feedback and Leith for the China reference. A quick poll of the blogosphere suggests that consensus is along these lines. Begs the question as to why the conflicted voices are the ones that are generally the loudest…
Do not forget the Australian dollar. In 1997 I was amazed at how quickly the Australian dollar fell in response to the Asian Economic Crisis. The dollar is fetching $US1.065 this morning. Chinese property action is “taking a breather” as I speak. As the Chinese property market falls down its curve, I predict that the Australian dollar will go from over parity to $US0.80 in two days! If you’re in the Aussie, don’t kid yourself, you won’t be able to get out!
Either we have crossed the Styx and the USD currency crisis is upon us – or, as you suggest Noel (and for what it’s worth, I agree) – the commodity trade comes to a very abrupt end.