November 2nd, 2011
08:39 AM GMT
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(CNN) –  In an interview with the New York Times last year, leading hedge fund manager Jim Chanos described China’s property market as “Dubai times a thousand."

He was of course referring to the collapse of the Gulf state's overheated real estate market in 2009 after a six-year boom.

In another interview with Bloomberg during the same period, Chanos said China – which has enjoyed its own boom – was on a “treadmill to hell.”

"They can’t afford to get off this heroin of property development," he claimed. "It's the only thing keeping the economic growth numbers growing.”

A year on and the prominent China-watcher says the treadmill has only gotten “bigger and faster…than ever.”

He told Bloomberg that China continued to rely on real estate for economic growth, pointing out that consumption as a percentage of GDP had dropped and that fixed-asset investment is “what’s driving everything,” citing an increase of 24% year-on-year compared to 9% GDP growth.

Home prices in China fell for the first time this year at the turn of Q3, dropping 0.23% last month from September when they fell 0.03%, according to SouFun Holdings, China’s largest property website.

Meanwhile, major property developers in China have started cutting prices on new projects, sparking confrontations  with angry purchasers at developers’ offices last week.  In fact, housing prices in tier one cities could fall by as much as 30%, according to Ba Shusong, a researcher at the State Council’s Development Research Center.

The Chinese government introduced a broad series of curbing measures this year to rein in soaring prices, including stricter homeowner requirements and tightened lending to buyers and developers.

Chanos says the hard landing has already begun. “The Chinese are beginning to realize that property prices can go down as well as up and this is going to be a very, very troubling development for the Chinese property market,” he told Bloomberg.

“The property slowdown or worse has started…Most China observers were not talking about any landing three months ago and now they are confidently talking about a soft landing.”

But not everyone agrees.

The recent downturn is merely a “self-inflicted correction phase”, according to Nicole Wong, regional head of property research at CLSA Asia-Pacific.

She described fears of a hard landing as a “misunderstanding of China’s property market.  It's not a real market dominated by supply and demand, it’s dominated by the direction of government policy.”

“In recent years, the Chinese government has driven a lot of money into the market and created imbalances, so now they’re trying to balance it and make it productive.”

She added that China’s market is “definitely very different from that of Dubai, which is very much a supply and demand-driven market. The government’s role is much smaller [in Dubai] because of the capital market structure.”

The bursting of Dubai’s property bubble

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Filed under: China

soundoff (26 Responses)
  1. sssssssss


    November 2, 2011 at 9:51 am |
  2. 4AllJustice

    Properties prices are already being slashed the propertie bubble is about to burst dragging the fake economy down,
    soon massive social unrest will follow. These people that got rich with building business will be the Regime's scapegoat to blame (instead of the corrupt regime policies and officials) and will end up in jail, killed or expatriated and their money confiscated by the regime like has happen before in history, like the landowner movement when the Dictatorship stole the land of chinese farmers no matter how small their piece of land, labeling these people as greedy capitalists enemies of the people.
    As the dictatorship history repeats itself, common folk few last years have been robbed and forcefull evicted from their homes and farmlands so local officials could sell to land developers making huge profit in the ever growing bubble market. All this will going to be pinned on these rich builders by the Regime

    November 2, 2011 at 9:59 am |
  3. paul

    if there is going to be a property bubble in China, then it will be worse than the greek, Italian, spain and European debt crisis combined. Unfortunately its inevitable that a Chinese property bubble is certain to happen. Whatever goes up comes down. The Chinese property boom has happened so fast and steep that a fall will be a heavy thud to be heard and send tremors across the world. instead of China trying to raise money to cushion Euro debt, let them keep tens of trillion to cushion home owners between current artificial and real property prices.

    November 2, 2011 at 10:16 am |
  4. maxwellstar

    The only treadmill to hell is the US policy of 0% interest rate and QE. In China stock and property prices are fallen because the Chinese government in the past 18 months or more has raised the interest rate six times and the bank reserve requirements ten times. It has also set more stringent rules on lending. Unlike in the US where Ben Bernanke had just said that 0% interest rate will last at least untill 2013 and we just had QE 2.5 with operation Twist. The problem with China and America and the rest of the world is that back in 2008 they have in a blind panic taken decisions that further damaged there economies like printing money and pushing interest rates down too low. This has now created a assets bubble around the world and rising inflation. China is going to have to pay a price for her economic transgressions of the last 2 year's. America cannot rais interest rate because then assets prices are going to fall and since the FED is sitting on more than a trillion $ of worthless mortgage backed securities that they payed 100 cent to the dollar back in 2008. With only about $20 billion of it's own capital it's now on the hook for liabilities of more than a trillion dollars. The FED is now leveraged 53 to 1. This means that just a 2% drop in assets prices would bankrupt the FED. Raising interest rates in the US also means that the banks that where previously had being bailed out have to go back into bankruptcy again. And since the US government is guaranteeing both the Fannie and Freddie bonds and also the counter party risks of the banks they may go bankrupt too. Because higher interest rate means lower home prices and that will bankrupt a huge part of the American people too. And since the US government is guaranteeing everything they are going to end up paying the whole motherload. In order to prevent the collapse of the entire US establishment (the banks, the government and the FED) the US has to keep printing money and keep interest rate at zero while inflation is spiraling out of control. That is what i call a treadmill to hell. America laughing at China's problems is like a stone high drug addict laughing at the redraw symptoms of another drug addict.

    November 2, 2011 at 10:41 am |
  5. chinapride

    USA is the real bubble !

    November 2, 2011 at 10:51 am |
  6. Glans

    maxwellstar, inflation is not spiraling out of control.

    November 2, 2011 at 11:08 am |
  7. China Man

    What a blue sky? So, the CNN's pollution report was a lie?


    November 2, 2011 at 11:11 am |
  8. Hmmm

    ...........The truth (as always) lies somewhere in between ........

    November 2, 2011 at 11:23 am |
  9. jc

    so what ?

    November 2, 2011 at 11:25 am |
  10. Jack

    It is unthinkable

    November 2, 2011 at 12:18 pm |
  11. Anand Yadav

    It is not possible that Chinese real estate collapse suddenly and create a huge shock wave. Since this is the biggest income source for the Government, they will try to supprot Housing business to the end. However, it cannot continue growing for ever. Once the growth saturates, government position will weaken, may be changing the regime and even breaking China.

    November 2, 2011 at 12:49 pm |
  12. Johan

    To be honest i dont really think a drop in prices will be too hard considering the fact that they currently are very expensive. It might go down causing an increase in demand thus stabilizing it once again.

    November 2, 2011 at 3:58 pm |
  13. Ray

    I live in China right now and an apartment here cost as much as my house in America while only fetching in about 40% of my rental income in America. You do the math.

    November 2, 2011 at 6:03 pm |
  14. Joe Edge

    "…Most China observers were not talking about any landing three months ago and now they are confidently talking about a soft landing.”.... What ?
    That's all everyone HAS been talking about.... The debate over soft-landing versus hard-landing has been going on for over 4 years... Has this person not been listening ? ?

    November 3, 2011 at 12:16 am |
  15. That'snottrue:[

    Again....CNN have nothing to talk about really, the "bubble burst" debate's being going on forever.... and CNN is always wrong, report on real news =.= This debate is going no where, and the government is creating laws to KEEP the price down, not up. Commentors on here, watchsome Chinese, or at the least Asian news...

    November 3, 2011 at 1:37 am |

    The big bubble had already started, it get bigger one day and then smaller the next day and vice versa but only in the minds of the speculators, punters and shortists. The Western media play its part through biased reports and unbecoming exaggeration from bits of information here and there. The China bashers get more prominence and independent expert opinions are hard to find. But all use one parameter – the failed American economy to teach others.

    November 3, 2011 at 1:23 pm |
  17. jesus

    Well a property bubble could exist if you had a lehmans brothers or goldman sachs type of "investment house" or US type of bank with little regulation.
    I doubt such exists with that intensity in china at the moment....?

    November 3, 2011 at 1:41 pm |
  18. china's problem

    What's china's problem in Recession.

    China has thousands and million buildings more than the world. It possible to believe china isn't overpopulated country. There's one child policy and imbalance gender, Many 40-70 years old can't find wife in china. They force to work mass produce building over in china. Today, 65.5% of china's building stand nearly empty. There's going to be more and more.

    November 3, 2011 at 2:56 pm |
  19. Strangewalk

    I know some people here in a tier-two city in Jiangsu (200km from Shanghai) who pay 2500 RMB per month rent for a new 3 bedroom detached home that was on the market for 2.5 million RMB, but didn't sell. That means the sales price is nearly 10 times higher than what's justified by rent according to US valuation metrics, but this imbalance is nothing compared to what's going on in the big tier one cities. Also, it's known that much or even most of the financing for real-estate in China is either off bank balance sheets or from the extensive non-bank, underground system that's not directly influenced by government fiscal policies. We can't know what exactly will happen, but we do know, and everyone here knows, that basic economic laws and common sense are being violated on a massive scale.

    November 3, 2011 at 9:57 pm |
  20. Nervousinvestor013

    "He who rides a tiger cannot dismount." Chinese proverb

    November 3, 2011 at 11:25 pm |
  21. Fong

    Chanos manages a hedge fund. His comments cannot be more self serving. Maybe he sold short already. There is nothing more happy than for him to see chaos. But he is dreaming with eyes wide open! Bubbles happen because properties are propped up by debts, mortgages. So when housing prices fall, it causes a chain reaction, a financial crisis. But most of the Chinese paid cash for their homes. Very few buy on credit, i.e. take out mortgages. So there is no bubble. There is no mortgage payments to meet. Also there is no property tax in China. So what if the houses they live in is valued less than before. The slack in construction activities in the private developer market is more than make up by the massive government construction of lower price housing. CNN should be more conscientious in reporting than to be used by a self serving wall streeter!

    November 4, 2011 at 12:41 am |
  22. rory wong

    china has a lot of money to invest or to buy,but stop by all western countries in the name of national interest in disregard of high the chinese money was force to lend the money out in term of bonds. in the end the west would not pay and default the loan. i think that is the conspiracies in the mind of the west or at least in the mind of the U.S.A. wake up China don't fall in the trap.

    November 4, 2011 at 6:26 am |
  23. AM

    There isn't enough resources in the world, demand in the west, or enough chineese with money to pay rent to keep the China bubble going for much longer.

    November 6, 2011 at 6:03 pm |
  24. Rich

    Fong is completely correct. Uninformed people need to shut up & get an education before flapping their gums.

    I spend 4-6 months per year of my time here in China on business for the last 8 years. I have entertained City Council members, District Directors, Gov. Company CEOs (i.e., Ministers) & Governmental Investment Agency V.P.s in my homes in China, L.A. & San Diego. I have processed & obtained green cards for them & their families. One division of our company involves land development, design & construction material.

    We ourselves bought homes, cars & offices here cash up front since 2008. At that time, when the U.S. & European markets in land & banking were melting down, practically all of real estate purchases here were still CASH up front.

    I tried explaining monthly mortgage bills & property taxes to my Chinese friends & they just stared at me in stupor.

    There are very few monthly bills in China. Everything is calculated & paid for the whole year cash up front. The price of homes skyrocketed because the NUMBER OF CONSUMER MIDDLE CLASS MEMBERS skyrocketed, NOT because the number of "no-doc.", 100-110% mortgages skyrocketed like in the U.S !

    This is a totally different situation here in China. The prices of homes went down because the GROWTH RATE of the consumer middle class slowed down, because the exports to Europe & the U.S. slowed down (after the 2008 crash), so less people have less cash & developers have to drop their prices. But that means more people will afford the homes as more people are leaving the countryside for the cities. Yes they over-built, but the government has charged all provinces with the responsibility to increase the number of citizenry living in cities to over 51% from the current 30-40%.

    That's why the building craze - to fill the cities with CONSUMER MIDDLE CLASS who will replace the export consumers with domestic consumers so the GDP will depend more on the local home market. City dwellers buy things. That's exactly what made the U.S. such a powerhouse economy, 65% of our GDP was domestic consumer spending.

    The BANKS messed it all up in the U.S., but here, the banks are gov. OWNED, not just regulated. So there's been no bubble created here by wall street derivatives & investment schemes. There are price lowerings, but no massive financially manipulated economic activity to burst.

    November 8, 2011 at 7:57 am |
  25. Sobel

    I lived in a smaller (around 1 million people) inland city from 2004-2006. I was amazed at the number of apartment buildings in my city that remained completely empty. What amazed me even more is that every week there seemed to be a new apartment complex being built. I had some friends that lived in the southern portion of the city and one week there would be low income housing next to a factory and the next week the housing complex would be completely gone making way for a new 6-story apartment complex. There were entire new complexes that were empty when I arrived ( and looked like they had been there a while) and when I left there were more new empty complexes. The people in the city simply couldn't afford the new places being built, but they kept being built anyway.

    November 15, 2011 at 7:06 am |
  26. yatin mondkar

    "She described fears of a hard landing as a 'misunderstanding of China’s property market. It's not a real market dominated by supply and demand, it’s dominated by the direction of government policy.'"

    I find this risible. All markets are predicated on supply and demand. Even the Soviet economy was based on supply and demand. No amount of government intervention, planning, and centralization will suspend the laws of nature. As long as human beings make up the economy and not robots, markets will depend on animal spirits and spontaneous order.

    The conceit of knowledge is alive and well.

    November 17, 2011 at 3:42 am |

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