Michael Shaoul: We Are Shorting Chinese H Shares; China’s Property Slide Is Just Beginning

In this episode of China Money Podcast, guest Michael Shaoul, chairman of Marketfield Asset Management, expresses his bearish views on the Chinese economy and expects the current economic slowdown to last until the end of this year, in stark contrast to the consensus view that the economy will pick up speed during the second half of 2012.

Q: First quarter GDP in China was 8.1 percent, lower than market expectations of 8.3 percent. Do you see the Chinese economy continue to soften further?

A: Yes, we do. We ourselves don’t concentrate on the GDP, particularly, we’ve been very focused on the real estate sector. In terms of sales, now there is negative growth and shrinkage of activity. Our assumption is that it will start feeding into the construction of real estate later this year. That’s really when the overall economic statistics of China will decelerate more markedly.

Q: So your biggest concern is the property sector. How bad do you think it will get?

A: I think pretty bad. The Chinese property sector reminds us a lot of the U.S. in 2007. What you started to see is that the collapse in transaction activity is starting to decelerate very sharply. The next stage of a housing correction is that the prices will come down. Now in the majority of Chinese cities, we do have prices coming down.

The third stage is where it really feeds into the wider economy. It is when you start to decelerate the pace of building. In the end, the property sector will be the epicenter and the beginning point of a Chinese economic slowdown.

Q: But we know that the Chinese property market is much less leveraged than the U.S. Most mortgages have equity of over 50 percent in them?

A: I think that’s true. It will have a different cycle to the U.S. But if you went back in the U.S. twenty or thirty years, you would also have a much less levered real estate sector. But we still managed to have some really tough real estate and economic cycles, in the late 1970s, late 1980s and early 1990s.

The difference between a highly levered real estate cycle and a moderately levered real estate cycle is that, in the highly levered real estate cycle, the general population losses a bit of money and the banks lose a lot of money. In the moderately levered cycle, the people lose quite a bit of money and the banks lose a little bit of money.

I’m not sure which one is better or worse. It really depends on whether you are a bank or bank shareholder, or an individual owner of real estate.

Q: But in China’s case, the owners are not forced to sell, so prices are unlikely to drop dramatically?

A: True, the owners are not forced to sell. But what happens after a real estate boom is that everybody who wanted to buy a house has already bought two or three. (In a down cycle), these houses are not worth what you thought they would be worth at the time of the purchase. There are no one else to sell them to. You are simply sitting on “dead asset.”

It’s true that it doesn’t create a forced sale, but it’s also true that you have lost money. It’s very much like buy equity, but not with a margin account. Though you are not forced to sell it (if the price went down), but you still lost money.

About Michael Shaoul:
Michael Shaoul is chairman of Marketfield Asset Management, a New York-based investment firm that oversees more than US$1.5 billion. The Marketfield Fund beat 97 percent of its peers in 2011. Mr. Shaoul also serves as chief executive officer of Oscar Gruss and Son Incorporated, a New York Stock Exchange member firm. Between 1992 and 1996, Mr. Shaoul ran Park Square Associates, a Manhattan-based real estate investment and management company.

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