Why Chanos has a right to be worried

Housing prices are down in major cities while supply is growing: New residential real estate investment alone accounted for 14% of China’s GDP in 2009, and housing prices have started to come down, though the overall supply is still growing sharply in 2010. Even Goldman Sachs forecasts a 10% to 20% housing price decline between now and the end of 2011.

Bank lending in China over the past two years has exploded: Lending is up 95% year over year in 2009 vs. 2008, and up another 60% through the third quarter of 2010. And off-the-books bank lending to local government finance companies might have been as much as $1.6 trillion from 2004 to 2009.

Overall, China’s an economy on steroids: Fully 66% of GDP is accounted for by fixed-asset investment — an unsustainably high figure.

Why Chanos may be off the mark

Housing prices are growing but still affordable in smaller cities: Prices have come down a bit in the largest four cities, but in smaller cities, where most of China lives, housing prices are 70% below those in Shanghai or Beijing, are growing moderately, and thus are still affordable.

Leverage in China’s financial sector, particularly in housing finance, is low: Only 40% of all housing purchases are mortgage-financed. The rest are paid for in cash. Mortgage debt as a share of GDP is only 14%, compared with 79% in the U.S. at its peak in 2007.

Personal income growth is still rising, and so is productivity: Real urban disposable income has risen by 7% a year since 2000, and rose 7.5% in the first half of 2010. Real output per worker is increasing by 10% to 12% a year, according to the World Bank.

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