A bubble in China?

In the April's 19 BusinessWeek issue Charlie Rose had an interview with Jim Chanos, who is a hedge-fund manager and the president and founder of Kynikos Associates which is an investment company that specializes in short-selling. (short-selling is simply a way of speculation in which individual A borrows assets (bonds, stocks, or any type of security) from individual B and sell those assets to individual C. Individual A is expecting the price of those assets to go down in value to buy them back at a lower price and return them to individual B. In the mean time making a profit from selling those assets to individual C. Please keep in mind that it could work the other way in which those assets go up in value and need to be returned to individual B at a loss to individual A).

The interview focus on the risk of a bubble in the real estate market in China. According to Jim Chanos China's GDP is 50% to 60% dependent on construction. Also, China gives a lot of incentives and rewards to keep GDP growth increasing and thus, according to Mr. Chanos, the easiest way to do this is by just putting another building. However, the problem is not just construction, the problem is that the cost of these condos and offices is increasing compared to how much people actually make in China. He gives the example in which the cost of a condominium to the average Chinese two-income couple is around $100,000 to $150,000 U.S. This couple probably makes combined $7,000 to $8,000 a year. Thus, buying something when it is unable to be paid with the actual income earned is really dangerous, as it has been seen in the U.S and/or Dubai.

Putting this on perspective it is also important to mention that no one single country is exempt from a crisis. Mexico 1994, Asia 1997, Argentina 1999, and so many others. The important thing to keep in mind is to start thinking how to deal with it.