Chanos Wrong on China Property Slump, Fan Gang Says

Date: Tuesday, April 27, 2010
Author: Bloomberg

Hedge fund manager James Chanos is overly pessimistic about China’s property market because he underestimates government efforts to avoid a bubble, according to Fan Gang, a former People’s Bank of China adviser.

Chanos said this month that China is on a “treadmill to hell” because it’s hooked on property development for driving growth. “That statement is under the assumption that Chinese are stupid, Chinese will not do anything to deal with that,” Fan said in a Bloomberg Television interview recorded in Hong Kong yesterday.

While some cities show signs of excessive price gains, government efforts are stabilizing the market before the emergence of any “big” bubble such as those seen previously in the U.S. and Japan, Fan said. Officials rolled out the “most draconian” measures yet to cool prices after record gains in March, according to Deutsche Bank AG.

In an e-mail, Chanos, the president of hedge-fund firm Kynikos Associates Ltd., declined to respond to Fan’s comments.

Last month’s data for 70 major cities showed an 11.7 percent gain in residential and commercial real-estate prices from a year earlier. In the southern city of Haikou, on the island of Hainan, prices jumped 54 percent.

Measures to cool the market have included a ban on loans for third-home purchases and raising mortgage rates and down- payment requirements for second-home purchases.

Clampdown

The government is countering asset-bubble risks because the issue is social and political as well as financial, said Fan, who’s director of the National Institute of Economic Research in Beijing. He is also a former academic member of the central bank’s monetary policy committee.

Fan’s comments contrast with Chanos saying this month that the nation has “a world class, if not the world class, property bubble,” primarily from the construction of high-rise buildings.

China is in the throes of “a vast property mania,” with expectations for a currency revaluation helping to fuel a market bubble, according to Andy Xie, an independent economist in Shanghai. Xie was formerly Morgan Stanley’s chief economist for the Asia-Pacific region.

Fan said China will adopt a more flexible currency regime “sooner or later,” when the global economy stabilizes, after keeping the yuan pegged at about 6.83 per dollar from July 2008 as a crisis measure. “I don’t know when,” he added.

He said he preferred gradual change, rather than a “radical” move.

Currency Bets

Non-deliverable yuan forwards indicate the currency may gain 3.3 percent against the dollar in the next 12 months. U.S. Treasury Secretary Timothy F. Geithner fueled speculation that China may let the yuan appreciate by postponing a report that could label the nation a currency manipulator.

“It’s obviously important to the world” that the country makes the shift, Geithner said at a press briefing on April 23, after a meeting with finance chiefs from the Group of 20 nations in Washington.

A more flexible Chinese currency could help to limit global imbalances in spending and saving that contributed to the financial crisis.

China’s government last month appointed three economists, Zhou Qiren, Xia Bin and Li Daokui, to the central bank’s monetary policy committee to replace Fan, formerly the sole academic member.