Overheated China real estate may hurt commodity producers

Source : Business Times – 27 Jan 2010

It will affect demand for building materials, says hedge fund manager

Raw materials producers that sell to China may be hurt by slowing demand because the nation’s real estate market is poised for a ’stumble’, according to hedge fund manager James Chanos.

A Chinese credit-driven property bubble with ‘far-reaching impact’ may be overheating, threatening demand for industrial materials used in buildings, Mr Chanos said.

‘One needs to look at building materials globally; increasingly they’re priced on the margin for the China bid,’ Mr Chanos, the founder of Kynikos Associates Ltd, said on Monday at a conference in London. ‘If the China bid turns into a China offer, there’s going to be an air pocket in the prices of many of these industrial commodities that are used in constructing homes and office buildings.’

China’s growth rate in the fourth quarter accelerated at the fastest pace since 2007, as the nation’s US$586 billion stimulus spending and record lending stoked car and property sales. That has raised concerns the government may increase interest rates or take other measures to curb inflation and limit asset bubbles.

Mr Chanos was one of the first investors to foresee the 2001 collapse of Houston-based energy company Enron Corp. His hedge fund is known for shorting stocks, or wagering on shares of companies he expects to fall. In a short sale, investors borrow shares with the intention of buying the stock back at a lower price and returning it to the lender.

‘This is not a call for an impending crash,’ Mr Chanos said. ‘What we are saying is that there are classic pockets of overheating and overindulgence.’

China’s property market data may be masking the degree that speculation is driving prices in some of the larger cities, Ardo Hansson, the World Bank’s chief economist for China, said on Monday in an interview. Government data this month showed Chinese real-estate prices climbed the most in 18 months in December, highlighting a struggle to rein in speculation while sustaining an economic rebound.

Steel prices in China, the world’s biggest producer of the metal, dropped the most in four months last week as inventories piled up and concerns grew that the government may curb lending.

Meanwhile, investor Mark Mobius said he still doesn’t believe China is experiencing a property market bubble.

‘If a property bubble means too high prices, you can see much higher prices in Australia or Hong Kong,’ Mr Mobius, who oversees US$34 billion of developing-nation assets at Templeton Asset Management Ltd, told investors on Monday in Bangkok.