China's Overdue Bust

Beijing Seen Vacant for 50% as Chanos Predicts Crash (Update1)

Feb. 12 (Bloomberg) -- Jack Rodman, who has made a career of selling soured property loans from Los Angeles to Tokyo, sees a crash looming in China. He keeps a slide show on his computer of empty office buildings in Beijing, his home since 2002. The tally: 55, with another dozen candidates.

“I took these pictures to try to impress upon these people the massive amount of oversupply,” said Rodman, 63, president of Global Distressed Solutions LLC, which advises private equity and hedge funds on Chinese property and banking. Rodman figures about half of the city’s commercial space is vacant, more than was leased in Germany’s five biggest office markets in 2009.

Beijing’s office vacancy rate of 22.4 percent in the third quarter of last year was the ninth-highest of 103 markets tracked by CB Richard Ellis Group Inc., a real estate broker. Those figures don’t include many buildings about to open, such as the city’s tallest, the 6.6-billion yuan ($966 million) 74- story China World Tower 3.

Empty buildings are sprouting across China as companies with access to some of the $1.4 trillion in new loans last year build skyscrapers. Former Morgan Stanley chief Asia economist Andy Xie and hedge fund manager James Chanos say the country’s property market is in a bubble.

“There’s a monumental property bubble and fixed-asset investment bubble that China has underway right now,” Chanos said in a Jan. 25 Bloomberg Television interview. “And deflating that gently will be difficult at best.”

Japanese Comparison

The risks are so great that a decade of little or no growth, as Japan experienced in the 1990s, can’t be dismissed, said Patrick Chovanec, an associate professor in the School of Economics and Management at Beijing’s Tsinghua University, ranked China’s top university by the Times newspaper in London.

The Nikkei 225 Stock Average surged sixfold and commercial property prices in metropolitan Tokyo rose fourfold before the bubble burst in 1990. The Nikkei trades at about a quarter of its December 1989 peak.

“You have state-owned enterprises using borrowed funds from the stimulus bidding up the price of land -- not even desirable plots of land -- in Beijing to astronomical rates,” Chovanec said. “At the same time you have 30 percent-plus vacancy rates and slumping rents in commercial property so it’s just a case of when you recognize the losses -- or don’t.”

‘Dubai Times 1,000’

Chanos, founder of New York-based Kynikos Associates Ltd., predicted that China could be “Dubai times 100 or 1,000.” Real estate prices there have fallen almost 50 percent from their 2008 peak as the emirate struggles under at least $80 billion of debt. The economy may shrink 0.4 percent this year, Shuaa Capital, the biggest U.A.E. investment bank, says.

The commercial property space under construction in China at the end of November was the equivalent of 6,800 Burj Khalifas -- the 160-story Dubai skyscraper that’s the world’s tallest.

It’s difficult to determine how exposed Chinese banks are to real estate debt because loans booked to some state-owned companies as industrial lending may have been used to invest in property, say Xie and Charlene Chu, who analyzes Chinese banks for London-based Fitch Ratings Ltd. in Beijing.

A drop in the property market may be accompanied by a surge in nonperforming loans. The Shanghai office of the banking regulatory commission said on Feb. 4 that a 10 percent fall in property values would triple the ratio of delinquent mortgages there.

Balance Sheet Deterioration

While neither Xie nor Chu see nonperforming loan ratios reaching the level of a decade ago, when they made up 40 percent of total lending, they say banks will see deterioration in their balance sheets.


“A lot of people will lose a lot of money, but the banks will probably not go down like in the 1990s,” Xie said in a phone interview. “Of course there will be a lot of bad debts. There will be a lot of mortgages gone bad I think.”

Rodman displays the slide show to private equity and hedge fund clients brought in by banks such as Goldman Sachs Group Inc. at his office in eastern Beijing.

China is the only place in the world that despite having more empty buildings than the rest of the world has yet to reflect those valuations on their balance sheet,” Rodman said.

Empty Buildings

Gazing south from the building that houses the Beijing headquarters of Goldman Sachs, UBS AG and JPMorgan Chase & Co., one of the first structures in the field of vision is a 17-story office tower at No. 9 Financial Street. Empty.

Farther along are the two 18-story towers of the Bank of Communications Co. complex. Dirt is gathering at the doors and the lobby is now a bicycle parking lot. A spokeswoman for the Shanghai-based lender didn’t return phone calls and e-mails.

The supply of office buildings will continue to grow.

Comments:

China's inflated real estate market is going to go bust.  The only questions are how soon and how quickly prices will deflate.


This could trigger another flight to safety in the US dollar in the short to medium term.

Comments

  1. So what will happen when it busts?

    It doesn't read as though the Chinese are worried. "Big deal, an increase in bad mortgages," they seem to say.

    What happens, what are the possibilities? And what are the solutions, if any?

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  2. The concern in China, in my view, is an unraveling of social stability. With few social safety nets in what is still a poor country in rural areas, the jobless would return to their rural roots. A very sharp correction could result in civil unrest.
    At this point, there is nothing the central planners can do to avoid a correction. The misallocation of capital has been too great. The danger, in my view, is that the central planners will come up with yet another scheme to keep the bubble inflated. If that occurs, the consequences will be worse.
    It appears that no one has learned the lesson of Japan, that central planning does not work in the long run. Only the market has the wisdom to allocate capital wisely and efficiently.

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