Chanos on China

The 2 panel graphic to the left is from an 18 panel presentation   "China: The Edifice Complex" from Jim Chanos Kynikos Associates at the April 5, 2013 Wine Country Conference.

Jim notes that China's capacity over investment (Cement 12%, Steel 10%, Autos 18%) through 2008-2012 is leading to asset depreciation liabilities via the law of diminishing returns and that the pervasive growth of credit is leaving banks poorly capitalized for potential losses.

Overheard:

• “GDP figures are ‘man-made’ and therefore unreliable, Li said.” Li Keqiang, 1st Vice Premier China US Embassy Cable March 15, 2007 - Wikileaks December 4, 2010
  
  
• “To some extent, this is fundamentally a Ponzi scheme.” Xiao Gang, Chairman Bank of China “Regulating shadow banking” China Daily, October 10, 2012
  
  
• “The bubble must be controlled, or both the real estate market and domestic economy will be jeopardized” Wang Shi, Chairman China Vanke “Vanke boss sees bubble in spike” Standard, January 29, 2013
  
  
• "The government has already been considered untrustworthy, let alone businesses…" Chinese Netizen “Chinese companies trusted in China, says US report; Nope, Say netizens” China Times, February 6, 2013

"Hong Kong Chinese are leaving Vancouver by the thousands" According to the The Vancouver Sun April 17, 2013

Huh? A west-east carry trade? Sell Vancouver, buy Hong Kong? Nope. As far as Vancouver is concerned it's a population driven event from the excess and worried wealth of Mainland China. The Vancouver Sun quotes an April 13th story in the South China Morning Post "mainland Chinese arrivals in Vancouver outstripped those from Hong Kong by 7,872 to 286 in 2012."

The current animal spirits are still feeding off of debt and Canada continues to be a leader in leveraging it. Canadian credit market debt is now 165% of disposable income (Statistics Canada March 15, 2013). 

Canadian household debt continues to trend higher (chart left).

As can be seen from the chart above in the upper panel on stock and commodity markets, not all stock markets are back to their pre-blowout highs of 2007-08, most are not. Nor are the commodity markets back to their 2011 highs. Unless they breakout, as a minority of stock markets have, then the trend for commodity prices is still down. The combination of falling commodity prices and rising debt levels is not a successful investment model.

Real estate prices will follow commodity prices as new houses come on stream at prices below existing built houses. As credit risk gets re-examined, replacement value, comparative value and income value will all point to a return to fundamentals.

Follow the Money or "First there is a mountain, then there is no mountain, then there is." (Zen Aphorism, Donovan, etal)

The Super Rich are peevish (contrary) when it comes to accepting what comes out of the mouths of real estate promoters: "Vancouver is Unique". I heard this oft touted phrase from a genial Realtor last weekend at his west side Vancouver open house in a below street level grade "garden" condo asking well over $600,000 (~$650/sf); it looked to me like a good place for starting a mold farm. 

The tables presented here are from The Wealth Report 2012 created by Knight Frank and Citi Private Banking gleaned from opinions of their HNWI (High Net Worth Individuals) aka The Super Rich.

To gauge which cities are considered the most important to the world’s HNWIs, The Wealth Report surveyed Citi Private Bank’s wealth advisors around the world and Knight Frank’s global network of luxury property specialists. They asked which are the most important cities to their clients now, which will be the most important in 10 years, and which are growing in importance the fastest. In addition respondents were also asked to name the cities that they felt were global leaders in the fields of economic activity, political power, knowledge and influence, and quality of life.

Apparently very wealthy people enjoy Vancouver over Toronto for "Quality of Life" but as a destination for "Knowledge, Influence, Political Power or Economic Activity", Canadian cities don't make the list. When it comes to grading Canadian cities by the well heeled with respect to a trend to rising importance in the world, only Vancouver is currently viewed in ranking as important but with a bias to the downside as developing destinations move up the list.

If we look at the top tier cities in these two tables, it's evident that the Super Rich, the 1-2%, the Go-to-Folks want reliable established proven money and power centric cities (London, New York, Paris) or alternatively they look for emerging volatile liquidity centers (Beijing, Shanghai, Singapore) so they can leverage some change. 

Canada is a nice place to visit and perhaps dabble in real estate flipping during a manic heat wave but the real money is flowing elsewhere.

A new page devoted to Whale Watching and the Knight Frank data is here now.