Yves here. We’ve pointed out from time to time with respect to China that no large economy has ever made the transition from being investment-led to consumption-led without suffering a financial crisis. Here, short-seller Jim Chanos, who has been too early with respect to China longer than Nouriel Roubini was with respect to the global financial crisis, argues that the Chinese real estate bubble has gotten so out of hand despite repeated efforts by the government to let air out of it that bad outcomes can’t be put off much longer. But while Chanos had earlier worried about financial outcomes, he’s now alarmed about political repercussions.
Note that despite the scale of the Chinese real estate mania, a 2008-style blowup is highly unlikely. Japan had a proportionately much larger bubble than the US did, even factoring in our financial system leverage due to derivatives, but their banks didn’t fall over (at least not until 1997, when the BoJ unwisely thought the crisis was over and started tightening) but instead underwent zombifacation, which resulted in a lost two-plus decades.
Recall that even right after the global financial crisis, Ambrose Evans-Pritchard was regularly pointing out that China was having to resort to higher and higher proportions of debt to generate and extra dollar of GDP. As of 2009, his sources pegged the ratio as 4-5 in borrowings to 1 of GDP increase. It can’t have gotten better since then.
To add to Chanos’ sobering overview, Bloomberg recently wrote about supply chain financing as another major source of leverage in China:
At over 1,100 listed companies in China’s industrial and manufacturing sectors, receivables are piling up; cash conversion cycles are getting longer (that is, the time it takes to turn inventory investments into cash); and net short-term debt levels are becoming increasingly volatile, a Bloomberg Opinion analysis shows….
Chinese suppliers wait a long time to get paid by their customers, which squeezes their working capital. Even in the pre-pandemic good times of 2019, it took almost 92 days on average, compared with 51 in the U.S. To bridge that funding gap, companies increasingly have turned to supply chain financing — instead of waiting to get paid, firms go to a third party that hands over cash sooner. A big benefit is that companies struggling to borrow can use their assets as collateral, which helps break the vicious cycle of weak creditworthiness.
That’s what eventually caught up with Evergrande. Inventory makes up a big portion of its working capital, and as that deteriorated, bills piled up…. In addition to the debt the company took out from mainstream financing channels, Evergrande leaned on vendors and other parts of its supply chain — apartment buyers and customers. It even roped in its employees, who were told to invest in the company’s wealth products…
Companies across China’s industrial landscape have turned to similar arrangements to alleviate their funding troubles. Supply chain financing has exploded over the past few years, ballooning to 17.4 trillion yuan ($2.69 trillion) by 2019, at a compounded annual growth rate of 10.6% since 2015. Banks, along with trust companies, insurance firms and other non-bank financial institutions, play an active role.
Now consider the impact of substantial backlogs at US ports and the impact of China’s energy crisis. On the latter, per the Financial Times:
Factory owners in China and their customers worldwide have been told to prepare for power supply disruptions becoming part of life as President Xi Jinping doggedly weans the world’s second-biggest economy off its dependence on coal.
Months of shortages have cut power to households in China’s north-east and caused outages at factories across the country. But energy demand is still surging amid record demand for Chinese exports, and the problems will be compounded by the prospect of freezing temperatures in winter…
Trueanalog Strictly OEM, a factory producing loudspeakers near Guangzhou, is emblematic of the crunch already hitting exporters from frequent outages. Owner Philip Richardson said his company was stuck “playing catch-up”.
“It’s the domino effect when you cut electricity: it directly affects the glues in the production line, we have to reset the jigging, it removes 20 to 30 per cent of productivity from the day . . . It’s really a hassle,” he said.
Will Jones, chief operating officer for the British Home Enhancement Trade Association, said a third of members in the DIY and gardening sector reported that suppliers had extended their lead times.
PlutoniumKun provided this tidbit about Chinese real estate in comments:
Chinese construction quality is pretty horrifying by any standard (with the exception of a few very high income areas). The reasons for this are quite straightforward – financial suppression means that the only real way Chinese people can save is by investing in property, which is seen as much safer than the stock market or the shadow banking area. So houses become a little like bitcoin – their notional value is very different from the objective value of having a home. In China, people quote prices per square metre. I remember my surprise when Chinese friends would ask me ‘how much is an apartment in Ireland?’ They wanted the answer in per metre terms – of course I had no idea.
So apartments in particular (because it’s hard to buy land or many forms of commercial property) become commodified. Nearly all are bought off the plans a few years before they are built. Buyers aren’t particularly interested in the quality as they assume the government will maintain high prices (probably correctly) and they are rarely interested in rental income, as tenants can be too annoying. So there is zero incentive for developers to do anything but a bare minimum construction standard. Add to this the widespread fakery of products, and you have a massive malinvestment issue.
By Lynn Parramore, senior research analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website
Renowned short-seller Jim Chanos, founder of Kynikos Associates, is what you might call the “ever-bear” of China. For more than a decade, he has warned that the country was building a real estate-driven economy on a feeble house of cards. He spoke to the Institute for New Economic Thinking’s Lynn Parramore about how he views the chickens coming home to roost as the property giant Evergrande – now the world’s most indebted property developer — teeters on the verge of collapse.
Lynn Parramore: Back in ’09, when you started looking at China, your real estate analysts alerted you to the mind-boggling amount of real estate overdevelopment there. You warned that this overdevelopment would end badly. After Xi Jinping became president in 2013, you expressed the then-minority view that a different kind of leader had arrived on the scene. What’s your take on what has happened since then?
Jim Chanos: In 2013, we put a slide in our presentation for investors and talks that was very controversial – especially for Chinese nationals. It showed President Xi Jinping in emperor’s garb. People thought we should take it out, that it was offensive. At the time, Xi was widely seen as just the latest in a series of technocrats who had risen through the ranks — one who would follow along with Deng Xiaoping’s reforms. It’s “capitalism with Chinese characteristics.” It’s okay to get rich as long as the country prospers.
But a few things made us think, no, this guy is different. His first speech in China after becoming president was critical of the Soviet Union for being soft on perestroika. They should have crushed it when they had the chance, he said. Xi then set up an institute to study the Soviet Union’s collapse. That was a red flag to us that he was going to be more hardline than people thought. He went on to do an anti-corruption drive, which people dismissed as a typical settling of scores that Chinese leaders do. But it actually extended beyond that. A couple of years later, he began talking in Puritanical terms about social issues. Again, that was different. Nobody had cared about that stuff for 20 years. Do what you want as long as you don’t question the party. Next, we had the book collecting his speeches and writings, which people could be seen carrying around. He started showing up in military events dressed in Mao jackets. This symbolism isn’t lost in China.
We noticed all this, but the real switch occurred in 2019 when he started going after celebrities like Jack Ma [co-founder of Alibaba]. At that point, it was clear that this president was not stepping down at the end of 10 years. He was taking a much harder line on the “flowers of capitalism,” if you will, than past presidents. In 2021, all of this exploded into the open. There’s been initiative after initiative. Redistributing wealth to the masses. Going after other leaders. Overlaid on top of this is the Evergrande saga.
LP: Let’s talk about Evergrande, the Shenzhen developer whose crisis has got everybody worried. How did things get so bad?
JC: Last year, as the tech crackdown was gaining momentum, Xi’s administration put down a set of rules called the “three red lines.” They were sort of balance sheet financial tests. It was an attempt to deleverage the real estate developers.
LP: Which means he knew something was wrong.
JC: Well, here’s the problem. I always joke that when you have an investment-driven economic model, you know your annual GDP on January 1st of that year, because you can stick shovels in the ground to make your growth numbers. That’s how the model works. It’s not a consumption-based model. As we now know — and the Wall Street Journal just had some phenomenal numbers in a recent piece – that real estate construction is now larger than it was when he took office. I would always hear, well, don’t worry: these are smart guys, technocrats who see the problem and will wean themselves off this apartment construction-on-steroids. But they haven’t.
LP: Why haven’t they been able to slow it down?
JC: Since we started following China at the end of ’09, this is the fourth time that they’ve attempted to slow the real estate market down, because they do know that this is going to be basically too big to deal with if it keeps growing at the rate it’s growing. But every time they’ve done it, the economy has hit stall speed very quickly, and they panicked. They went from hitting the breaks to hitting the accelerator. That’s why we’ve seen higher levels of real estate. The idea that “I can’t lose buying apartments” became ingrained with bankers, real estate speculators, and the public.
LP: So with Evergrande, everyone came to expect a bailout?
JC: I think we’re at that crossroads. The problem is that these companies are so much bigger than they were in 2015 or 2011. Can you bail everybody out? In the case of the developers, you have an additional problem. The biggest amount of liabilities is not necessarily to banks and bondholders. It’s to apartment buyers. Here’s why: the Chinese real estate finance system is exactly the opposite of ours. In our system, when there’s a new development, you’re typically required to put 10% down to sign a contract, with the balance due on closing. You go get your financing and your mortgage proceeds pay for the rest of the house or the apartment. In China, you pay upfront. You are extending the developer a loan. So, of the $300 billion in liabilities Evergrande owes, I think the biggest chunk, last time I checked, is basically what we would call a deferred revenue item. It’s money that you took in from people, and you owe them an apartment. And the apartments aren’t done, but the money’s been spent. So the problem is not just bailing people out, but the question of who is going to put up more capital to pay off the retail people that have bought apartments that haven’t gotten anything.
These numbers are big, and Evergrande is not the only one. There are a handful of developers that are missing interest payments and have their bond prices reflecting distress.
LP: How much has corruption played a role in this mess?
JC: That’s a problem with their economic model focusing so much on real estate. Because they don’t have a local tax system, like property taxes, the local governments sell land to pay for local services. But whenever you have private developers buying land from municipalities controlled by one party, yeah, it’s ripe for corruption. We know that’s rampant in China.
LP: How do you view the policy reaction to Evergrande?
JC: So, what do the policymakers do? It’s not a Lehman moment in that there’s not a lot of cross-border interbank lending here. The Chinese system is still pretty much a closed financial system. That’s not the risk. During the Global Financial Crisis [GFC], what brought us to our knees was the liability side of the banks’ books. They couldn’t roll over the loans to each other because no one trusted the assets. Here, it’s the assets. I think that if they try to inflate it again, if they try to bail it out again, we’re only going to be right back in this soup in another two or three years, with even bigger problems.
LP: Is this only a problem with the real estate sector, or is it more extensive?
JC: Based on our analysis of the numbers – and you have to take the Chinese numbers with more than a shaker of salt – we’ve long thought that residential real estate was probably 20% of GDP and that all in, real estate construction and related services was about 25%. Ken Rogoff came out with a study last year that said it was 29%. That’s already a huge amount compared to other countries.
Well, the numbers that the Wall Street Journal just put out were staggering, implying that there were 1.6 million acres of residential real estate under construction. If you do the math, it’s the equivalent of 72 million apartments. We believed that they were selling 20 million a year, but the WSJ story seems to imply that the numbers are actually much, much bigger. That tells me that our numbers and Rogoff’s numbers regarding GDP are probably on the low side. It could be a 30-40% problem, not a 20-25% problem. It’s just magnitudes bigger. We’ve never seen anything like this. And there’s no game plan, no historical analog. Maybe Tokyo in ’89? But this is worse than that. It’s worse than Spain in ’06 or Ireland in ’06. We’ve just never seen an economy this dependent on putting up apartment buildings — apartments that nobody is residing in. Everybody already has an apartment! These additional ones are second and third apartments at this point, and only for people who can afford them because they’re extremely expensive.
I think the Chinese government has convinced themselves that by borrowing lots of money from their own citizens and elsewhere, that there’s ongoing activity that is sustainable. But as we find out in every real estate bubble that bursts, when your activity is constructing real estate itself and you’re taking capital and turning it into income by paying construction workers and real estate brokers and everybody else, when that activity ends, it goes poof! And there’s no income from the asset you’ve just financed. It’s not like building a factory where you have demand for your products. It’s just apartments sitting empty in Beijing or Shenzhen.
LP: How does this problem relate to Chinese politics?
JC: As all of this is happening on the financial and economic front, along with the crackdown on business elites, we’ve seen a commensurate rise in bellicosity, in saber-rattling toward Taiwan, India, and Tibet. We’ve seen a much more aggressive posture from Xi in relating to the West. Now every day there’s a warning in one of the Chinese Communist Party organs threatening Australia if they come to Taiwan, threatening Japan. I don’t know if the Party is preparing the citizenry for a “them.” Someone to blame.
LP: As we’ve seen with the pandemic already.
JC: Yes, and in the way they’ve treated the West’s outrage about the concentration camps in Xinjiang province. That’s the classic authoritarian move. We know it from our own country. Blame someone. “It’s their fault, not our fault.” We need an enemy. I don’t know how real the saber-rattling is. Is it a distraction from domestic belt-tightening that’s coming? Planting the idea that we’re going through hard times because the whole world is against us? We’ll see. It’s an incredibly interesting time to be watching China.
LP: What does it all mean to the rest of the world?
JC: Again, I think it’s not a financial transmission issue reverberating through the financial systems and markets. I do think that it will affect global growth. China was a full point of the 3% global real growth we’ve had since the GFC. Without China, it’s 2%. So China itself, by growing 7 or 8% a year was a disproportionate amount of global growth. It’s also going to impact what I call Greater China, which is Taiwan, South Korea, Singapore – the areas that trade very actively with China. And it will definitely impact commodity exporters. In this massive build-out, China has continued to suck in iron ore and copper and all kinds of things from a variety of different countries like Brazil and Australia. But I think that the impact might be more political than financial. That’s what worries me.
LP: How would you characterize these worries?
JC: It’s the rise of bellicosity, the rise of a more militant China as the economy and the financial situation has gotten more precarious. That’s a 1930s kind of problem. We know that a rise in authoritarianism and statism around the world was one of the upshots of ’29-’32. You had leaders saying, “I’m the one that can get us out of this problem” and “They are the ones who got us here.” This situation in China is a little bit frightening to the student of history, because there’s no doubt, whether you’re flying over Taiwan airspace or coming close to ships in the South China Sea, that there’s a rise of tensions in and around China. I don’t think it’s a coincidence.
LP: To touch on Xi’s crackdown on the tech industry, how do you view that in the context of the need to lessen this dependency on the real estate sector? Certainly, we can see in our own case with Silicon Valley — Facebook and so on — that poorly regulated tech is a problem. But what does Xi’s stance mean in the context of his desire for China to be a leader in innovation, on the cutting edge of technology?
JC: That was always one of the responses to our concerns about the investment-driven model. People said, well, everyone does everything on their smartphone in China. They’re far more advanced in social media than we are and more advanced in payment systems, and so on.
The problem was that, number one, it gave rise to these global tech celebrities, and number two, I think China, or the Party, realized a little bit later than they might have that the control of databases and information that these companies have is certainly a power center. And the one thing that the Communist Party cannot brook is a threat to its control. There are no other political parties, no free press. The only thing that could challenge control is the thing that people said would liberalize China – the internet. Access to the internet, access to ideas, access to global media. People thought these things would democratize China, but Xi is saying no: we’re going to put up a Great Firewall and we’re not going to allow Alibaba to have as much power as the Party.
LP: And it looks like he’s going after the banks next.
JC: The real estate system is so big, and so levered – the banking system has grown with it, of course. It seems to me that Xi is basically going through all the power centers — technology, finance, etc., and cracking down. He’s making sure his people are completely in charge and that there’s no interference, no other power centers. And it makes me ask why. What’s the end game? I mean, the Party has control of the country for the most part. The citizens understand that. So why? What is coming that he feels he needs to make sure that all of his people are in control? I can’t help but think of Stalin. The end game puzzles me the most. Is it to prepare for a takeover of Taiwan? To be more forceful on the international stage? I don’t know.
LP: What is distinct about China’s vision of capitalism in the context of a one-party system? What are its particular features and challenges?
JC: What distinguishes China and what makes it so unique from my perspective, putting on the financial historian’s hat, is that the speed at which they developed was unprecedented, and the amount of risk they have taken to do that is unprecedented. Their banking system is now the largest in the world. The amount of real estate construction is just completely insane, and until, perhaps, this past 12 months, we haven’t seen a real, serious effort to say, “Maybe we should rethink this fantasy where everybody is going to have six apartments. Maybe we need to do other things in our economy to balance it out.”
How are they going to deal with the transition? Because they’re going to have to do it at some point. I think it’s going to be fascinating to see how they try to get out of it. Do they switch spending to defense spending? Do we get an arms race? Can they keep a closed currency? There are a whole lot of big questions.
They’ve got to make some tough decisions on how the economic model is going to work going forward. In the late ‘80s, everybody thought Japan was going to surpass the U.S., but they had the same problems – a banking system that was bloated, real estate prices too high, too dependent on exports, and they’ve had 30 years of muddling through. The idea that China is going to be growing 6 or 7% while the rest of the world is growing 2% just has to be revisited. It’s not gonna happen. That realization is going to be the bucket of cold water that’s going to force them to rethink next steps. The population has been used to this leveraged prosperity, and everybody has borrowed money to buy real estate. What are the next steps? It’s otherworldly what they have done with real estate. Whatever happens, it’s going to be severe somehow. Whether it’s politically or financially — whatever it is, it’ll be severe.
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I’ve not always been a fan of Chanos – China bears have a habit of getting proven wrong – but I think he is one of the few observers of China who takes the ‘big picture’ – rather than getting tied up in the minutiae of data watching he takes the longer historical overview and doesn’t get too tied up in assuming that there is something unique about China’s development model (there isn’t, its the same familiar playbook many other countries have used, just on a much larger scale). So far as anyone really has a clue what is going on, this is as good a big picture overview as you’ll get.
One huge problem that China has right now is that its repeated postponing of making the hard decisions that everyone has known it would have to take is that there are now huge interest groups within China that will do their best to stop it. We’ve seen this year that there is a ‘fossil fuel’ lobby in China as big, powerful and stupid as that lobby everywhere else. There is a construction industry lobby as big as the one that nearly crippled Japan, making sensible policy making in the 1990’s almost impossible. There may even be a nascient military industrial complex. There is also a network of provincial governmental systems that quite like the way things work right now and have no incentive to change. So just because Beijing knows what needs to be done, doesn’t mean it will get done. There is an enormous amount of momentum behind the existing, disfunctional system.
Xi is fascinating – I’d compare him to Putin in that he is a smart autocrat – someone who doesn’t just have a lot of power, but who knows how to use it, and has a very sound intellectual grasp of what needs to be done, at least from his ideological perspective. The problem is of course that the CCP was deliberately reorganised after Mao to make sure that no one individual would have too much power to screw things up in the way he did in the end, but now everything has reverted back to that model, and so a lot depends on the direction he takes. And nobody really knows what he is thinking. Maybe he isn’t sure.
The good news for China is that some elements of the economy are doing spectacularly well – in particular, in the past 5 years Chinese industry has surged up the value chain. The old days when China made iPhones out of parts almost entirely sourced from Japan or South Korea or Taiwan are gone. China is rapidly turning into a technical powerhouse (and of course this is not particularly welcomed by its ‘older brothers’ in the region). The problem the CCP faces is that you cannot employ a billion people in the high tech industry. You need other sources of jobs and wealth creation, not to mention sources of clean nutritious foods and clean air and water. There are directions China can take that would make China – and its neighbours – a much better place. But the crucial decisions will be made in the next year or two as this is clearly the window of opportunity Xi has been looking for. All will become clear in a couple of years.
I thought Chanos was good in being circumspect about not knowing Xi’s motives.
Maybe he’s a Stalin who’s just looking for his own domination of the system, but he comes from a very different tradition. May be he’s a Communist, like Chanos would claim Roosevelt was, who actually sees a stronger nation in a healthy population free from the stresses and anxiety of poverty and economic coercion.
“Free” beneath an ideological umbrella that balances competing power centers in a mixed economy within an overall vision of national success, kind of like the New Deal with Chinese Characteristics. We’ll see, shortly it seems!
Example that comes to mind is Sinopec, as my dad had worked on joint-ventures with Sinopec (oil, gas, and petrochemical) since the mid 1980’s. Just the scale of Sinopec should give pause. It’s second only to Walmart in revenue (before the pandemic) and has well over half a million employees.
There’s also the auto lobby, where in the past, local governments pulled out bike lanes and banned electric bikes to stimulate demand. I’m just guessing, but that’s perhaps why mass transit in some Chinese cities were slow to develop. In Beijing, the subways only expanded past the original two lines because of the 2008 Olympics.
“…So houses become a little like bitcoin – their notional value is very different from the objective value of having a home…”
How is that different from what is going on in Canada and US where houses have become an inflation hedge and sit also empty for most of the year?
I am not sure the populace of China will be so understanding of a real estate collapse as was experienced in Japan. My Japanese is rusty, but the phrase “shikataganai” (nothing can be done) was pretty central to the Japanese ethos. As well, the property bubble in Japan seemed mostly concentrated in the business properties (and the tidbit that the Japanese emperor’s palace was worth more than Manhattan or some other comparison).
In China, you see tidbits of social uproar when expectations are not met – such as when universities are re-characterized as technical schools. This property ponzi-scheme (is it anything else?), that affects essentially the whole population has a good chance of not ending well.
Japan is a very egalitarian society and great efforts were made to preserve employment. The big companies all cut pay to the senior ranks (even though wage differences between junior and senior staffers weren’t that great to begin with). Middle and lower income Chinese who sank all of their savings into a property in advance and aren’t made close to whole won’t take that well. And what happens when they get older and are in poverty?
China, despite being nominally socialist/communist, has pretty much no social safety net. Recently, the idea was that as the economy goes up, it’s not necessary as everyone can make/save money.
It may well come back to haunt them, especially as the age pyramid inverts.
It will be interesting to see the CCP forced into providing a “social safety net”, almost as exotic as seeing the US forced into a National Health Service.
Social safety in China is provided through a system called 五险一金，which consists of 5 mandatory insurance schemes (pension fund, medical insurance, industrial injury insurance, unemployment insurance, and maternity insurance) + a housing fund.
I don’t know how well it works in practice, but I wouldn’t say that there is zero social safety net in China.
IIRC, the issue is that the state pension is wage-determined, but for many reasons, many people weren’t on official wages.
My anecdotes were that for most people, state pension was deep below-poverty-level money.
the examples I know of are middle class and can receive about US$150 a month.
Since the 1990’s the Chinese social insurance systems have been employer based, which works fine, so long as your employer is solvent and honest. In reality, many employees (as the Evergrande employees have found to their cost) find that their ‘contributions’ are just bumping up investments in the company.
Its quite a regular feature in China to run into dignified protests with older people standing outside various public offices. Usually, its people who retired to find that their ‘pension funds’ have been pilfered by well connected employers.
Why China opted for this system, I’ve no idea – I think it was partly because when the reforms were made in the mid 1990’s most people were still directly or indirectly State employees, or possibly they were just influenced by the successful Singapore model, but in the wild west of much Chinese business, its a recipe for disaster for millions of people.
The reality is that most Chinese people, rationally or not, do not consider depending on the State insurance or social welfare systems for their old age to be a sensible strategy. Among other things, this is yet another driver behind the market for apartments. These are, in effect, peoples pension pots.
milton freidman advised them. nuff said.
I think a key difference between China and Japan, is that for most Japanese, their pensions and savings were and are mostly tied up in the giant JapanPost savings system, which was largely impervious to the crash. For most Japanese, the huge rise in property prices was irrelevant, as there was never a culture of flipping properties or relying on second homes as a source of investment and savings. Most of the ‘value’ in the bubble was entirely theoretical. If you live in your parents home and you intend to pass it on to your children, then its value at a given time is largely irrelevant.
Things are very different in China, where the public pension and savings system is much less dependable and stable. Your apartment really is your pension.
That is also used here in the US. When people are old, out of money and have no other options they can give their house and any extra social security income to the state and the state pays for their long term care, I assume with a federal subsidy. The analysis (yesterday) about how the environment will never be repaired until China and the US come together to promote green initiatives globally was interesting. As long as we are in white-hot competition with each other we defeat any obligation to care about the planet. We can’t really do otherwise. Not to even mention war. But if we and China come together in cooperation we can change the course of environmental destruction. Obviously one huge thing we have in common is a big aging population that we have no answers for. Old age and death simply are not profitable. It could become a turning point – one big enough to change the social contract globally. One big enough to override the profit imperative. And one important enough to do so.
As an independent investor, Jim can freely swim across topic borders going from history to economics to politics at will to form his opinions. Economists cannot. To start musing about corruption or culture is outside their discipline which is why they can’t foresee the future for China well. The best they can do is predict the next quarter’s growth percentages. It’s an art, not a science and thankfully Jim doesn’t bring too much ideological baggage to the debate unlike many Americans.
“…foresee the future…” Interesting advert in the NYRB on a new book called “Shamanomics: A Short Guide to the Failure, Fallacies and Future of Macroeconomics.” I appreciate that Chanos, whatever his virtues and vices, does not profess to own a crystal ball. This should mitigate a bit any failures of hindsight.
I only know China from a numismatic perspective and there was just scant interest as there was no home market, coins almost always being worth more in the host country, but the Chinese in the PRC didn’t have the wherewithal, desire or ability to buy back their past.
It was strictly ho hum compared to the market in older Japanese coins which was gangbusters in the 70’s & 80’s, only to crash and never recover.
The market for older European coins in the then western countries was exciting, lots of demand. Interest has been fading for years though, younger adults don’t care.
There were a few well known and traded Chinese coins, one of them was called a ‘Birds over Junk’ silver Dollar only made in one year-1932, with the offending birds removed in future strikings, as they resembled Japanese airplanes.
When I was in business they were always worth around $200-250 depending on the condition of uncirculated (brand new-never used in coin jargon) they were.
I must’ve bought and sold a dozen or 2 of them, the value never varied in 20 years, the interest was mostly in the west, as the coin had an interesting tale.
In correspondence with a friend who was in the business since the 60’s, he tells me that a Birds over Junk in mint state 64 (the $250 kind circa 1990) is now worth $40,000 in China.
There is similar trajectory for an awful lot of older Chinese machine struck coins. It’s a bubble unlike any i’ve seen in other countries in the 70’s & 80’s. It’s similar to them but the drastic increases in value are startling.
https://coins.ha.com/itm/china/china-republic-birds-over-junk-dollar-year-21-1932-ms64-pcgs-/a/3064-30608.s
This tracks what I’ve heard of the art and antique market in China. In the mid to late 90’s, my parents as expats in Beijing were able to scoop up some really nice pieces at prices that are unthinkable today.
In the late 1990’s, with a few other people I found myself in a tiny antique shop in a small city in the very north of China near the Mongolian border, along with a Chinese professor of the old school – the owner was a friend of his, and he just wanted to chat. It was packed with oddities, including a small mat made entirely of mouse skin and a variety of odds and ends that had survived the mid-20th Century turmoils. I knew little to nothing of Chinese collectables and I had very little money anyway, but I bought some cast iron Mongolian horse stirrips, which still hold my bedrooom door open in warm weather. I got the distinct impression that absolutely nobody but a few academics of the old school had the slightest interest in such things. It was still a common sight then to see the remains of old houses and temples exposed to the weather, with paintings and fittings just rotting away. It reminded me of Ireland in the 1970’s, where only, as one politician put it ‘belted earls’ were interested in conserving old things. The one thing the Chinese did like was old coins. I’d had the foresight to bring a stack of old pre-decimal Irish coins (which featured beautiful casts of animals and birds), which I gave away as gifts. Ethnic Mongolians seemed particularly fascinated by the fat bulls and lean horses.
But the price of collectables in China has rocketed. Partly, there seems to be an official policy of encouraging the rich to ‘repatriate’ Chinese treasures that were looted and scattered. A few moderately important pieces sold in house auctions here have gone for crazy prices. It also helps, I would imagine, for buyers to have antiques as a hidden store of wealth.
I don’t know much about coins, but the following flew under the radar some years back: https://www.wbur.org/hereandnow/2018/08/28/chinese-art-theft
“They’re passing up much more valuable art in favor of pieces that have some connection to Chinese history, and especially this history of defeat or humiliation that the Chinese feel between the century of 1840 and 1949, what they call the Century of Humiliation, when China was invaded and carved up by foreign armies. During that period, a lot of art was taken by Western powers to be displayed in these resplendent museums back in the West, and it seems like whoever’s breaking into these museums now, they want to make sure they take those pieces back, and they’re willing to leave much more valuable pieces that don’t have that provenance.”
Awesome ty for sharing such a niche thing, i had to look up numismatic.
That has to mean something, gonna keep an eye on that birds over junk myself from now on
Thank you, PK.
And NC for publishing this.
Whenever I see a boom I start by asking myself where the $ is coming from,and who is taking the risk.
In China the new Chinese Middle Class will be paying the piper, immiserating your middle class is destabilizing for any Society.
Xi seems to be a much better than average Emperor, he and Putin put the West to shame when it comes to both competence and actually caring about their Country.
I really don’t know that China has much of a choice but to deal with this self-created emergency. They have been kicking the can down the road for years hoping that the problem would solve itself while they got rich, but that made it only far worse. So now some major structural reforms are going to have to be made and it will get bloody. But if they leave all these problems in place, it will only serve to make China weaker and with naval forces from around the world showing up in their front yard to confront them, they know what the price of weakness will be.
The only quibble I would make is that no, not everyone already owns an apartment in China, not by a long shot. If the stock of apartments was redistributed, sure, every family could probably have one, but right now you have families with many many apartments (often unfinished, no taps, no furniture etc) and you have families that have none, maybe a house back in the rural hometown, though they may have even sold that.
A lot of the apartments are built in places no one wants to live anyway. Although, the high speed rail and metros are being built out which could make those places more accessible in the future.
A friend recently passed a story to me of a guy who was having trouble finding a girlfriend. His parents gave him an apartment this summer. He had a blind date in September, and the wedding date is now already set. Having an apartment is very important.
I’d say young people are looking at housing prices and feeling either very rich because their parents have several, or horribly depressed that they’ll never get one. The whole “tangping” idea. Why even bother when the deck is so stacked against you?
Plenty of young people I know live in cramped conditions and commute ridiculous hours to jobs that pay between 5-10 thousand RMB in the city. After rent and living expenses, they’re not saving much, and they’ll never own a house at today’s prices. The prices need to come down, or the entire system needs to be reworked, or there will be unhappy young people.
Many of the houses are left empty as he points out, which means even though there is a lot of built living space, rent is still sky high in the areas people actually want to live! Housing prices and rent in Dongbei for example are very low by comparison to Shanghai, which I think is one of the world’s most expensive cities now.
I would say China really needs a public housing system. Singapore and Hong Kong come to mind as models.
While the Chinese fondness for owning property reminds me of goldbugs (screwing over places like Hong Kong, Vancouver, etc.), another driving factor is that local governments get significant discretionary funding by selling land use rights.
Property ownership rates in China are sky high – by recent counts just under 90%.
But certainly a major problem for young people is that costs are just too high. Most younger chinese I know were gifted apartments by their parents on marriage, although that creates its own problems (I know where young couples have been essentially told to ‘toe the line’ if they want somewhere to live.
I’ve just ordered the books, all three volumes. May as well know what the leader of China thinks because I suspect it’s all written down. Me? I’m a little guy. My interest is mere knowledge for knowledge’s sake. Taiwan, the various China Seas? All above my pay grade, and what I think matters about as much as the janitor’s opinion of the trading book at Goldman Sachs. Moreover, knowing I am the flea on a flea residing on an elephant walking through the forest is comforting in its own way. So I prepare for the future as best I can. Buying ammo and food? Nah. Not so much, that’s not me. Being as aware as I can be of what’s going on and why? Switching metaphors, mice survive amongst elephants by being quick enough to avoid being trampled. That’s more my style.
Would it be within character for the Chinese system to put a cap on the number of apartments a person can own? It would force the sale of apartments and drive down prices. The state could offer a floor at which it will step in and buy stock, or not. Put a break on the rentier class, while preserving a minimum level of the savings that have been invested. Would also allow for a level of redistribution.
The current proposals are to put in place property taxes to reduce speculation. But there is enormous opposition to this as it will hit values hard, and since 90% of Chinese people own apartments, thats a lot of people to annoy. There is also the risk that acting too strongly could set off a dramatic drop in value, which could run out of control. Essentially, the problem has been allowed to go on for far too long, which has deeply embedded the problem into the economic system. The time to fix this problem was 15 years ago, not now.
Probably the best approach would be to start seriously investing in public housing, perhaps even by buying up existing properties. But this would require fundamental changes in local government financing, as the existing system is heavily dependent on private land sales to fund local services. Essentially, it would mean Beijing stepping in directly, and its not clear that this would be welcome or practical, given the necessity to keep any number of local officials onside.
Even this may be problematic. Many Chinese public officials profited enormously when they were gifted (or sold at very low rates) their public apartments back in the 1990’s. In places like Shanghai, this quickly made a lot of people very rich (I know a few who sold up and moved to Europe on the proceeds). A public housing system may be gamed to ensure another such windfall in a few decades.
There are no easy answers.
Why not ask Michael Hudson what he thinks? Chanos has a distinctly western view about everything China. Michael Hudson has a more inside view. I think it has been MMTer Steve Keen who has been concerned about private debt in China for many years. For a while, I didn’t realize his concern was strictly about private debt, not government debt. Chanos does not recognize that the increasing USA belligerence may be driving China’s reaction. He doesn’t realize that China’s crackdown on private capitalists may be an attempt to avoid the mistakes of the USA. You can always put a western perspective on everything happening in China. It is just possible that the Chinese perspective might be the more realistic one. I certainly don’t know for sure what the future holds. Michael Hudson would certainly have a better perspective than I have.
My first thought when I’ve read this was that Michael Hudson is laughing out load from Chanos arguments. :)
More or less this: https://www.nakedcapitalism.com/2021/09/michael-hudson-on-renegade-inc-chinas-fortune-cookie-crumbles.html
The big blind spot in the Chanos analysis is lack of any consideration of China’s position facing the world’s most powerful empire.
No wonder Xi wants to study the collapse of the USSR — he wants to forestall any attempt by the US to buy off the Chinese elites and trash the country, as was attempted in Russia under Yeltsin. The Xi-deeply-wants-to-be-Stalin meme masks an aversion to doing a realist analysis of China as a US target. We know the Blob is capable of doing anything to take down any regime it identifies as a problem, and Xi’s measures seem like a reasonable response under such a system.
I have a problem with this statement in the last paragraph of the Chanos interview: “The population has been used to this leveraged prosperity, and everybody has borrowed money to buy real estate.” Chanos is extending an urban problem with real estate to a population that is still very much rural. I find it impossible to believe all 1.3 billion Chinese have borrowed to buy real estate particularly in light of the following from the referenced interview with Michael Hudson.
“China is currently semtexing residential buildings. These are buildings where they wanted to pre-plan for what they thought was going to be a rural exodus, but the rural exodus didn’t occur into these cities. Right now, China is focusing much more on rural development. China is primarily still a rural economy, a village economy. Most people don’t realize that. When you think of China, you think of Shanghai and Shenzhen and Beijing and even Wuhan. But the fact is that much of China’s rural and there can’t really be a rural exodus to the cities because you have a kind of passport plan in China. In order to live in Beijing, you have to have a permit to live in Beijing so the city won’t become even more overcrowded than it is now. They’re having to re-focus development much more on the rural areas that have not kept pace with the heavy industrial factory areas that have occurred. So they wanted to do a lot of building, not only to employ labour and to do construction, but to think just in case they needed this housing for the rural exodus, they needed it in place. Now they realise, OK, we’re not following that particular central planning idea. Central planning really is very hard. It’s very hard to build whole small cities in advance with nobody there. It’s much easier to wait until there are actual economic forces leading to development. So in that sense, China’s becoming more market oriented in its planning. But at the same time, it shapes the market, increasingly, to create domestic prosperity and earning opportunities, not unearned rent-extracting opportunities, but productive earning opportunities. This is an ongoing process of re-evaluating, restructuring, fixing up and improving the economy.”
Furthermore in a comment posted by Hudson in response to a question from a reader about the interview he provided a link to a book by Wen Tiejun titled “Ten Crises: The Political Economy of China’s Development (1949 to 2020)”. This is a very interesting read and therein describes the importance of China’s Urban/Rural dichotomy in creating soft landings for financial crises..
I too would be very interested in Michael Hudson’s and Pepe Escobar’s take on the Chanos interview.
Xi just needs a credible excuse to detonate the whole thing. Say the US economy were to collapse or go to a serious recession, that would provide cover to reset the entire system in China. Pure speculation on my part.
US — the multi-decade average of annual new housing is around 1.5 million units [1].
China — in the past decade, annual new housing has been around 6.5-7.5 million units [2]
This is roughly in proportion to the populations
[1] https://fred.stlouisfed.org/series/HOUST
[2] https://www.statista.com/statistics/242963/number-of-newly-built-apartments-in-china/
Pettis has a pretty good discussion.
Michael Pettis China evergrand a symptom of systemic
Sorry, not good at linking.
Dunno if NC has already linked it…
i was reading memoirs of an eastern european dissident who was present in the high stake discussions in Moscow during the Cuban missile crisis and the world was on the brink of nuclear war.
As the russian delegation presented the catastrophe that a nuclear war would cause with deaths of more than 300millions, the Chinese delegation view was that on the first world war 40million died and Russia was won to the communist cause, in the WW2 about 80million died and communism vastly expanded to eastern europe and asia , if another 300million die, communism will expand everywhere.
There is no religious or moral constraint in the chinese culture to prevent them from destroying the world.
Its an absolute materialistic culture.
I wonder if Chinese culture has its own version of the ” two campers and a bear” joke.
The ChinaGov may be thinking: “On the one hand, in a world of 8 billion people and rising, nothing is sustainable. On the other hand, we don’t have to outrun the bear. We just have to outrun you.”
“There is no religious or moral constraint in the chinese culture to prevent them from destroying the world.”
And yet they never started a World War. What’s next? Colonialism/slavery was what Jesus Christ prescribed for the natives?
I’m in no position to judge his take on real estate problems in China. But his general take on the current government just regurgitates the hysterical fear mongering that’s come to be depressingly common. Aggressiveness that’s a “1930s problem”. Hitler invoked. Check. Reassertion of state control makes him think of Stalin. Wishing to avoid something as disastrous as the collapse of the USSR was for it’s people makes the person who wants to study that a “hard liner.” Sabre rattling at Tibet, Taiwan, India. Is he aware that Tibet is part of China? That the sabre rattling with India has always been mutual? Does he see these Chinese reactions as developing in a vacuum? What?
Everyone in the US (with only a teeny number of holdouts) though residential real estate prices in the US could never fall on anything other than a regional basis until they did.
I similarly heard very intelligent people declare re Japan in the later 1980s that its stock and real estate markets would never fall, its capital flows were so large.
Do you remember the dot com mania? Companies that would never never never never show a dime in profits or positive cash flow nevertheless trading at huge prices because eyeballs?
The difference with China is that its bubble has gone on so long. Like the Japan real estate bubble, it’s domestic, so what foreigners think has pretty much no relevance to the dynamics. Unlike Japan, they big sources of leverage have been outside the banking system: private savings channeled through wealth management products or advanced payments on construction products. Based on history, the unwind will be painful. And it will fall mainly on citizens, not financial firms.
I suggest you give Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger a read and get back to me.
Depends on who owns these financial firms, I guess? See Ant Financial. Jack Ma could have done even more “damage” had he been allowed to proceed with his IPO. But eventually the hammer came down. State banks will survive no doubt, but private financial firms will be allowed to fail. That’s just my guess though.
I’m with you Darthbobber (@5:58). While Chanos is less shrill than most US mainstream commentators he still invokes dubious historic parallels.
As others have mentioned, I do wonder what Michael Hudson’s analysis is regarding the Chinese building boom. On the positive side I observe a government trying to prevent some of the egregious errors of the West such as out of control and destructive finance and big tech.
From an MMT perspective I wonder what it would mean in China to develop a more equitable distribution of real resources through massive new public programs in healthcare, childcare, support for seniors, etc. Could this be a way to counter discontent arising from problems in real estate?
Not to mention the “flying over Taiwan airspace” nonsense and “concentration camps in Xinjiang province”.
Its a mystery how the Politburo and Army decided to put Xi in. Accordingly, can it not be that Xi and his group are simply an agreed way to pass from one CCP Emperor to the next.
Perhaps it’s not about Xi, it’s all about potential Opposition. This Xi-as-President development permits a more useful way for China to identify and rectify Resistance, Sabotage and Counter-Revolutionary Elements, which are even less capable of developing into an external Opposition while New Dynasties are fostered inside the Party off to the side? Xi is told/allowed to form a slightly discrete, but separable part, less risky than having an Opposition. The news we miss out on in the West is the Politburo Non-Xi cliques, those fields of Cultivated Flowers which have not yet Blossomed.
The way we will figure this out will be when Xi and friends retire. They’ll be given stuff to do, but like the extra Pope we have in Rome, it will be marginal. The Party will sail onward. I doubt he’d try a Mexican standoff. No Tienanmen Square developments should ever occur again as Xi’s main job has been to eliminate Nascent Non-Party Opposition and secure future handovers.
And that’s what we see. He’s bashing the Uighurs, Taiwan(seen as Kuomintang and conduits for Japanese capital, which means he’s bashing any financiers in China who dont instantly toe the Party line), and anyone else who steps out of line, to enhance the Party Succession System. Jack Ma doing backflips for example. Now Xi needs to suck up the blame for this Evergrande debt overhang so the Party never has to. He’s not exactly fixing it, mainly as he’s not permitted to, just trying to tackle it in agreed phases. Like development/environment issues get ‘tackled’ all over the world.
The politics of events seem simpler, if Xi’s ultimately a fall guy, thats why I advance it.
I think it’s as good as anything I’ve read, but it has the same flaws that all current economic analysis have:
Progress defined as growth.
The Club of Rome had the fundamentally sound idea that there are limits to growth, and did a study all the way back in the early 70’s that has proven to be amazingly accurate.
When do we begin to define growth as not progress?
And what then becomes progress?
May I suggest that not causing the heat death of human civilization as a worthwhile alternate to unlimited growth? And that the most impressive recent actions by the Chinese government are restricting the availability of electrical power so that they can quit burning coal? If that’s what’s behind the power shortages in China, then they have taken an unprecedented step towards redefining progress – one that the rest of the world should applaud.
I think it’s as good as anything I’ve read, but it has the same flaws that all current economic analysis have:
Progress defined as growth.
The Club of Rome had the fundamentally sound idea that there are limits to growth, and did a study all the way back in the early 70’s that has proven to be amazingly accurate.
When do we begin to define growth as not progress?
And what then becomes progress?
May I suggest that not causing the heat death of human civilization as a worthwhile alternate to unlimited growth? And that the most impressive recent actions by the Chinese government are restricting the availability of electrical power so that they can quit burning coal? If that’s what’s behind the power shortages in China, then they have taken an unprecedented step towards redefining progress – one that the rest of the world should applaud.
Well . . . derisively respelling it may be a first step toward re-thinking it in a freed up way. “Groaf” was a step in that direction. So is “jawbs”. And “wurk” might be another.
Get a jawb and go to wurk. Do your part for economic groaf.