Hugh Hendry – partner, CIO of Eclectica Asset Management . Hugh is the principal portfolio manager and leads both the investment thinking and the research team. He has 18 years’ industry experience with Baillie Gifford, CSAM and Odey Asset Management. Hendy is famous for his bearish calls on China.
Below are some of his latest thoughts on China, first he discusses the beginning in 2000-2004.
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At first the scale of this speculation was hidden under the guise of an entirely plausible argument based on mass urbanisation. China, we were told, was merely investing as peasants moved en-masse to the coastal cities. Perfectly plausible. But perfectly wrong. During the period 2000 to 2003 mass migration to the cities peaked at 24 million people per annum. At the same time residential investment expanded to 4.1% of GDP and housing starts rose from 240m sqm per year to 440m. After that the urban population growth rate decelerated (to an average of only 19 million people per year) but residential development did not. Instead, housing starts went crazy, rising from 490m sqm in 2004 to 1,290m sqm six years later.
Next the financial crisis:
On official numbers, households raised their borrowing by $400bn and then $460bn in 2009 and 2010. That was an annual average increase 4x the increase seen in 2008. By 2009, individual mortgage borrowings where growing 6x faster than the year before as banks lent out a third of the total mortgage stock outstanding. By mid-2010, the share of residential properties purchased across Chinese cities as an investment hit an extreme peak of 40% and even the central bank estimated that 18% of households in Beijing owned two or more properties. Many of these lay vacant. It should not be surprising to learn that as a result of all this the ratio of household debt to income rose by almost 20 percentage points between the end of 2008 and the end of 2010. This was an incremental change greater than the one witnessed during the wilder years of the US boom. China has spent twice as much as the US relative to the size of its economy on its property bubble.