Interview with Anne Stevenson-Yang J Capital by Christoph Gisiger, Finanz und Wirtschaft Below is a brief excerpt reposted with permission
There have been warnings about a bubble in China’s housing market for some time now. How hot is the real estate market?
So far this year has been crazy, particularly in the area around Beijing. Just a few weeks ago I was in this little rustbelt city called Zhuozhou in the Hebei province where the steel mills are. It’s a very unpleasant place to spend time. It’s very polluted, there’s nothing to do, the food is bad and the landscape is awful. It’s just no place you want to be and yet property prices have doubled, tripled and in some places even quadrupled in a year.
What’s fueling this boom?
It’s like in every property bubble: People build these stories. In Florida for example, the idea in the housing bubble was that all Americans are going to retire there. Florida has nice beaches, it’s warm and Americans are getting older, so everybody’s going to retire there. In China, the idea is that all these areas 200 miles outside of Beijing are going to be bedrooms for the working class of Beijing. So they’re going to build subways, schools, hospitals and other public facilities there and the prices are going to go up. The story goes that all these people who can’t afford to live in Beijing but work there are going to live in places like Zhuozhou instead and that they are going to take the high speed rail into Beijing. Everybody is speculating like mad but in the end nobody wants to live there.
And how are such ghost towns financed?
There is probably no company that is more representative of the investment bubble than Evergrande. It’s the biggest pyramid scheme the world has yet seen. Evergrande is highly leveraged and has like 270 projects all over the country. I have been easily to 40 of them yet I have only seen one that was fully occupied. Many of these projects are megalomaniac visions and totally empty. Yet you go to these places and you see their sales room filled with young buyers. When I open my eyes I see crumbling stone and empty jungles or deserts. What they see is a future with wealthy Europeanized people strolling on modern paths. It’s just amazing. It’s a mass illusion and Evergrande more than any of these developers plays to this illusion by building developments that are specifically positioned for the investor, not to live there but to buy for some future appreciation in price.
How long can these crazy times last?
I’ve been wondering that for years now. In a few places, property bubbles already have popped but the government keeps information from going out. Back in 2011 for instance, there was a property bust in the region of Ordos where most of China’s coal is. Prices dropped like 50% but if you looked at the official statistics they may have dropped 4%. Another place was in Wenzhou which is a place in China’s Zhejiang province where there is a lot of private money. After the bubble popped the central government had to go in and had to create a bailout fund. But nobody ever got information about it. In fact, all the newspapers put out information about how actually Wenzhou is fine.
So will China’s housing frenzy ever come to an end at all?
China is going to hit a wall. They’re not positioned to take the political pain that’s entailed by just stopping with all that madness. So there will be a bust but it’s very hard to say exactly how long it takes. Basically, there are two paths. One of them is you break public confidence in some way. For that to happen you have to have a bank failure, a well-known investment product that doesn’t pay or some property developer that goes bust. You’ve had that locally in all sorts of places but you have to have a really big bust that everyone is aware of.
And what would be the other path?
The other thing that eventually has to happen is that the Chinese currency has to devalue. The reason why the developers can just keep on selling is because they keep getting refinanced. All the refinancing means that China has to keep on expanding the money supply and when you keep on expanding the money supply you have too much money and the value of the money declines. Obviously it’s not quite that simple but that’s basically what’s going on. For now, the only reason foreign corporations like BMW (BMW 79.15 -0.18%) or Swatch Group (UHR 377.1 -0.13%) are willing to take exchange rate of around 6.7 Renminbi to the dollar is because the Chinese government is standing behind the exchange rate paying those dollars. But at some point that has to stop because the Chinese government won’t have those dollars anymore.
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Another mystery is China’s cracking down on companies like HNA that have been very active overseas in terms of acquisitions. What’s your assessment of these interventions?
It all began with the insurance regulators. In February, they kidnapped Xiao Jianhua, the head of the private Hong Kong insurer Tomorrow Group, and took him back to the mainland. He is viewed as some type of family office manager to the high families in China. That means he knows a lot about who has money in China and where. Nobody really knows what’s going on with him, if he’s alive or not. He has certainly been under interrogation. Since that time, there have been a lot of regulatory actions against insurance companies. First the chairman of the insurance regulatory commission stepped down and was prosecuted. And now, companies like HNA, Wanda, Anbang and Fosun are under investigation. Their communality is that they all raise money from the public through insurance products which in reality are mainly investment products with a little tiny bit of insurance attached.
And where’s the link to the overseas acquisitions? In Switzerland for example, HNA has bought several companies, among them Gategroup (Gategroup 0 0%), and just recently became the largest shareholder of the travel retailer Dufry (DUFN 149.4 -0.2%).
HNA and the other companies have been raising money from these investment products and then using that money to buy overseas assets. They haven’t necessarily swapped the currency. But what you can do is you can deposit Renminbi in China and then take a loan from an overseas bank based on that deposit. So you could theoretically default on that deposit and still have the hard asset.
What’s the problem with that?
That means you’re basically exchanging Renminbi for dollars. The regulators don’t want these companies to take out the extra liquidity that the People’s Bank of China is putting into the domestic economy and transfer it overseas. That’s the issue. There are some elite power dynamics going on as well but we can only speculate on that. What we do know is that they don’t like it when people are taking money out of China.
