Thursday, April 15, 2010

China's economy grew 12% in q1, prompting fears that it's over-heating

The Financial Times reports that in 2010's first quarter, Chinese GDP grew 11.9%:
The Chinese economy grew at 11.9 per cent in the first quarter from a year ago, underlining the rapid recovery from the global economic crisis but raising fresh questions about the risks of overheating.
That's on the heels of a report just a few days ago in which the government warned the housing market was growing too fast:

China’s State Council warned on Wednesday about the risks of inflation and pledged to curb rapid increases in housing costs as new figures showed that property prices were continuing to accelerate.
In a statement released on Wednesay night, the State Council said that the dramatic increase in property values in some cities had become a “prominent problem” after government figures released earlier in the day showed urban housing prices in March rose 11.7 per cent during the previous 12 months, up from 10.7 per cent the month before and the biggest increase since the index began nearly five years ago.

Short-selling master Jim Chanos discussed his bearish view of the Chinese economy with Charlie Rose a few days ago.  He thinks the Chinese economy, 60% of which is tied to construction and encouraged by government officials who's compensation is tied to that construction, is "Dubai times 1,000:"


Excerpts from the interview:


You have said it's a thousand times worse than Dubai.
Well, we said that [with tongue] firmly planted in cheek. But then again, according to a news report this week, there's a developer that's going to put in a new Times Square in suburban Beijing, replete with 32 Broadway theaters. You're beginning to hear about these bizarre developments in China, indoor ski resorts similar to what we saw in Dubai.



I read today about a major private equity firm with billions invested in the belief that China will be the world's biggest economy by 2035. They wouldn't do that if they didn't think China could handle this housing bubble.
The perception seems to be that China will grow out of this situation. But the problem with that argument is the real estate being built is not for the masses. This is not affordable housing for the middle class. This is high-end condos in major urban areas and high-end office buildings. Just to give you an idea, right now construction costs in China are starting to hit $100 to $150 per square foot in some cities. That doesn't sound like a lot by Western standards, but it means a condominium basically presented to you with no floors, no walls, no appliances costs the average Chinese two-income couple $100,000 to $150,000 U.S. That Chinese two-income couple in their 30s probably makes combined $7,000 or $8,000 a year. You do the math. Even if they were making $10,000 to $15,000 a year, they couldn't carry a $150,000 condo. This is very similar to someone making $40,000 in the U.S. at the height of our bubble buying a $600,000 or $800,000 house. We know how that ended.





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