Saturday, March 8, 2014

Fairfax Financial 2013 Shareholder Letter Talks About the China Bubble $FFH

The Fairfax Financial shareholder letter for FY 2013 has a section about the China bubble:

In the last few years we have discussed the huge real estate bubble in China. In case you continue to be a skeptic, here are a few observations from Anne Stevenson Yang, an American who has been in China for over 20 years and is the founder of JCapital Research in Beijing:
1. China added 5.9 billion square metres of commercial buildings between 2008 and 2012 – the equivalent of more than 50 Manhattans – in just five years!
2. In 2012, China completed about 2 billion square metres of residential floor space – approximately 20 million units. For perspective, the U.S. at its peak built 2 million homes in a year.
3. At the end of 2013, China had about 6.6 billion square metres of new residential space under construction, around 60 million units.
4. Yinchuan, a city of 1.2 million people including the suburbs, has 30 million square metres of available apartments – roughly 300,000 units that could house 900,000 people. This is in addition to the delivered but unoccupied units. The city of Guiyang, capital of Guizhou Province, has roughly 5.5 million extra units for a city of 5 million.
5. In almost every city Anne has visited, pretty much the whole existing housing stock has been replicated and is empty.
6. Home ownership rates in China are estimated to be over 100% versus 65% in the U.S. Many cities report ownership over 200%. Tangshan, near Beijing, is one.
7. This real estate boom could only be financed through unrestrained credit growth. Since 2009, the Chinese banks have grown by the equivalent of the entire U.S. banking system or 15% of world GDP.
8. The real estate bubble has resulted in companies extensively borrowing and investing in real estate or lending on real estate in the shadow banking system. This is exactly what happened in Japan in the late 1980s.
9. And one observation of our own: Since 2009, the easing by the Federal Reserve combined with the explosive growth in China, backed by higher interest rates, has resulted in huge inflows (‘‘hot money’’) into China. The near unanimous view that the renminbi would strengthen has resulted in a massive carry trade where speculators have borrowed at low rates across the world and invested in China, almost always backed by real estate. The shadow banking system in China – i.e., assets not on the books of the major Chinese banks – is estimated by Bank of America Merrill Lynch to be approximately $4.7 trillion or 51% of Chinese GDP. Oddly enough, prior to the credit crisis, the U.S. had $4.5 trillion in asset-backed securities outstanding or approximately 31% of U.S. GDP. You know what happened then. When the flows reverse in China, watch out!
This seems to confirm our recent suspicions about China on this blog.

5 comments:

Stagflationary Mark said...

I don't understand why anyone would be bullish on China over the long-term.

1. Too many mouths to feed per acre.
2. Business model based on employing a billion people with unsustainable factory labor growth (neither export growth nor manual factory labor growth are sustainable).
3. They ship us goods. We ship them back paper dollars. Sort of worked for them when oil was $11, not so much with oil at $100.
4. No matter what the global economy does from here, I strongly believe that more Chinese will want to move to the USA than Americans wishing to move to China. I, for one, certainly won't be moving there.

#4 is a key distinction between us in the early 1900s and China in the early 2000s. If you aren't willing to emigrate to the world's future biggest "superpower" for a better life, then something must be wrong with the theory.

CP said...

"Chicago may need the kind of pick-me-up of that can only be found through a new super-tall structure."

http://www.theatlanticcities.com/neighborhoods/2014/02/chicago-spire-may-actually-get-built-after-all/8467/

CP said...

Mark,

#4 is a great point.

CP

Stagflationary Mark said...

"Chicago may need the kind of pick-me-up of that can only be found through a new super-tall structure."

Construction Started on the Empire State Building in 1929

It was just the sort of pick-me-up that New York needed at the time, lol. Sigh.

CP said...

Skyscraper indicator. It's basically foolproof and you see this everywhere you go.

Even in a second tier city, like for example a city now incorporated in LA county, the grandest old buildings were built in the late 20s.