China's Bubble and Commodities (The Green Faucet)
The most vociferous commodity bulls tend to be China bulls, and rightly so given that the price gains achieved across the industrial commodity complex over the past 12 months can only be justified by making the assumption that China will continue its rapid growth. China's importance to the commodity world stems from the fact that the bulk of its growth involves fixed-asset investment, which means that the growth is commodity-intensive. The risk to the bullish case is that a substantial chunk of this growth in fixed-asset investment is linked to a building boom that, to put it mildly, does not appear to be sustainable. To put it more bluntly, China's current building boom ranks with the construction of Qin Shi Huang's tomb* as one of history's all-time great examples of mal-investment.
One of the most prominent bears on China is Jim Chanos, a hedge fund manager who became well known about 10 years ago after making a large bearish bet against a highly regarded company (Enron) that he correctly identified as a giant scam. Chanos lays out his reasons for being bearish on China -- and, by extension, on commodities such as iron-ore that rely heavily on Chinese demand -- in the interview posted HERE. One of the key points is that a lot of the residential and commercial buildings that have been constructed in China over the past few years remain empty, and yet new buildings continue to go up at a frenetic pace. There appears to be a complete absence of traditional return-on-investment considerations, especially in the residential property market, in that investors often have no intention of generating any rental income from the houses and apartments they purchase. Renting is thought to be pointless, because even if a tenant could be found the yield would be so low that it wouldn't be worth the trouble. Instead, the plan in very many cases is simply to buy a property, hold onto it for a few years, and then sell it for a large profit. In other words, in China today the "greater fool theory" is being put into practice on a phenomenal scale.
READ FULL STORY HERE
No comments:
Post a Comment