China: The Emperor Is Naked

Jim Chanos: China’s “Leveraged Prosperity” Model is Doomed. And That’s Not the Worst. 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 started showing up in military events dressed in Mao jackets. This symbolism isn’t lost in China. ............

the real switch occurred in 2019 when he started going after celebrities like Jack Ma [co-founder of Alibaba]

............. 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. ............ 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. ........... 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. ............. The biggest amount of liabilities is not necessarily to banks and bondholders. It’s to apartment buyers. .......... In China, you pay upfront. You are extending the developer a loan. ........ 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.

.......... they don’t have a local tax system, like property taxes, the local governments sell land to pay for local services ......... 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. ......... 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 ......... 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. ........ 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!

............. It’s not like building a factory where you have demand for your products. It’s just apartments sitting empty in Beijing or Shenzhen. ......... 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. ............... 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 an incredibly interesting time to be watching China. ........ 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. ............. It’s the rise of bellicosity, the rise of a more militant China as the economy and the financial situation has gotten more precarious. ............ 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.” ........... 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. .......... Certainly, we can see in our own case with Silicon Valley — Facebook and so on — that poorly regulated tech is a problem. ............. 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. .......... 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. .......... 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

. ............ Xi is basically going through all the power centers — technology, finance, etc., and cracking down ........... 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? ...........

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

.............. 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.” ......... 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. .......... 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 population has been used to this leveraged prosperity, and everybody has borrowed money to buy real estate. .........

Whatever happens, it’s going to be severe somehow. Whether it’s politically or financially — whatever it is, it’ll be severe.

Jim Chanos on China: The Emperor is In His Underwear

The best-known China bear says the emperor is not yet naked, but getting there.

............ as of the summer of 09, China had 5.6 billion square meters of real estate under development, both approved and pending .......... their physical investments as a percentage of GDP was 50 percent. What they were doing was just stunning. They were literally building a whole country in a matter of years. ............ The Soviet Union and Japan, to some extent, in the late 80s, followed this model.

If you do dumb economic things, whether you’re capitalist, communist, or some hybrid, you ultimately pay the price.

.............. the veneer of technocratic excellence has been wiped away ....... in 2010. I was considered a crank, someone who had never been there, never spoken Mandarin. They said, you don’t know, these people are geniuses! .......... the rise of Xi Jinping, who is a much different leader than the previous two groups of party leaders. Under Hu Jintao and Jiang Zemin, China was open for business. As long as you don’t rock the political boat, you can go to Macau, buy your three Ferraris, have fun, make money. This is the new China. Then Xi comes in, and his first speech is a fiery speech in Guangdong Province, where he absolutely rips into the Soviet Union for being soft on Perestroika. ............ Cover up! He told the kids, go to bed earlier! I began to see that this guy is different. This guy really sees himself as father of China. ......... Sure enough, the cult of personality stuff started. He made the PLA ( People’s Liberation Army) senior officers take an oath of personal loyalty to him. That’s very important. ............ a very anti-Western tone. Now, if there’s a problem with the stock market, it’s Western speculators. If there’s something going on, it’s the West’s fault. ............

this model produces diminishing returns. The first international airport in a region is fantastic, the second one is questionable, and the third one is folly.

.............. even if we take the Chinese numbers at face value — which pretty much no thinking person does anymore —their nominal GDP has gone from 15 percent in 2010 (ten real, 5 inflation) to 5 percent now (7 real, 2 deflation) ..........

even with their numbers, a 200 basis point, a 2 percent drop every year in GDP. That’s serious

............ So, yes, they can keep GDP up by putting up another hydroelectric damn or building another highway, but if nobody travels on it, and there’s no river there, plus you have all this stuff you have to maintain, it’s expensive! .............. You still see tons of cranes putting up blocks of apartment buildings that by their very nature are unproductive. ............. they talk about it, and they talk about reform, but the fact of that matter is that to get to that point, they would have to drop investment and that would put the economy immediately into a tailspin. So they’re caught between this rock and a hard place of not being able to do exactly what they know they should do, which is to cut the investment, because that will bring on a recession. It’s an accounting identity. .............. Every time it seems that the economy takes another leg down, they pull out another set of infrastructure projects and announce they’re going to build them. ............ They don’t know what else to do because

to truly transform into a consumer and services-led economy, they have to stop planning stuff. They actually have to become real capitalists. They don’t want to do that.

............. the Internet itself is a power base, and under Xi Jinping, you can’t have another power base ..........

it’s going to be very problematic for any country that’s afraid of the Internet to dominate the digital century

........... the emperor might not be naked, but he’s pretty much in his underwear.