Hugh Hendry on China – The Emperor Has No Clothes

This is an astonishing video in China with Hugh Hendry, the money manager who is bearish on China who I profiled earlier this month. In it, he shows us building after building after building – all of them massive and all of them empty. And you see yet dozens of others still in construction in the background. Who is going to pay for all of this stuff?

Breathtaking. Hat tip Ravin.

Comments

[Dave Wrixon:]

This is absurd. Same sort of thing happened in the UK in the early eighties. Centre Point was famous for being kept empty by it owners. Did that mean the UK economy was doomed. Not a bit of it. It simply meant that the speculators felt that it made more sense to keep the places empty. Why? Mainly because their value was appreciating so rapidly that the rental income was regarded as paltry and occupancy was likely to depreciate the price more than the income was worth. In other words it paid to build but it did not pay to rent. Of course such market conditions are temporary, and of course the building will eventually get occupied. It is clear future demand in China will absorb the slack soon enough, unlike the the case in the US where there is unlikely ever to be a requirement for half the shopping mail that have been constructed recently. Does it show that China's economy is doomed? Absolutely not, as with UK 30 years ago, it probably just signals the dawn of a golden era.

Jul 26 02:54 AM

[DaveW:]

hmmm, going the road of Dubai? there are mines everywhere we turn, hidden amoungst green shoots...

Jul 26 03:01 AM

[Enough Wealth:]

I wouldn't care to guess. In theory, all the vacancy (and more) will be used up as China's massive rural population continues to urbanise and the economys' industrial revolution continues for the next couple of decades.

Then again, if the GFC impacts China's real economy too much (ie. the expected domestic demand isn't sufficient to keep the economy growing strongly enough the create all the new jobs required to urbanise the rural population and lift living standards) then there will be massive oversupply and a Japan-like property valuation crash.

I've no idea how China's GDP growth will turn out over the next few years. But if the current growth that is due largely to Chinese government stimulus spending trails off, things could get ugly very fast.

Jul 26 03:14 AM

[Ricard:]

This article is interesting, but I have to ask whether or not it derails the long term projection that China will march ever closer to developed world standards. At worst, it may cause a short term panic, but as long as it doesn't lead to a govt meltdown (highly unlikely), the long-term picture remains unchanged.

I'd also imagine that government stimulus was meant to counteract and replace this kind of spending by commerce - those funds may not be applied to the buildings directly, but infrastructure and resource accumulation will assure that in the future, businesses will rise that will eventually occupy the office space.

The fact that such footage exists justifies the need for the stimulus.

Jul 26 03:40 AM

[logicalthought:]

Guessing how many construction shortcuts are probably taken over there via bribes paid to building inspectors (if there even ARE any such inspections), my guess is that the "overcapacity problem" will take care of itself as about half of those empty buildings wind up collapsing. I just hope it happens before they're occupied.

Jul 26 08:46 AM

[Atticvs Res...:]

If you know Hugh Hendry you will know that he is almost completely unable to offer views that are anything but extreme. Accuracy and well balanced arguments are not part of his makeup. He is truly a most dreadful attention seeker, at all cost. I'm not about to defend the ills of China or other countries, nor am I about to sing the praises of the many good things that exist there. But I would urge taking Hugh Hendry's utterances with a good fistfull of salt.

Jul 26 10:51 AM

[Alan Young:]

Population of Dubai, 1.5 million
Population of China, 1.3 Billion
And you are comparing WHAT?

On Jul 26 03:01 AM DaveW wrote:

> hmmm, going the road of Dubai? there are mines everywhere we turn,
> hidden amoungst green shoots...

Jul 26 04:56 PM

[Alan Young:]

While prudence is always a virtue, not all expansions are followed by collapse.

I'm old enough to remember what the suburb-building boom of the 1950's looked like in eastern US. One year, empty fields; the next year, miles of empty houses and empty shopping centers; the third year, a new town. And 20 years later, thriving city.

It's a big gamble China is making, but it's way too soon for us to know if it's a big blunder, or good planning.

Jul 26 05:01 PM

[jerrydd:]

Alan Young you are forgetting the people who went broke before the bargain prices filled the homes up. Same will happen in China as is happening now here.

But I doubt China will ever have the export market here they had before as the US buying habits have change for a good while. maybe for a long while as when the recovery happens here oil prices will go so high it will put us right back into recession, thus little market for China.

Only countries that sell quality at reasonable price will win here in the future. That also mean US companies should do fairly well especially the ones in RE, eff cars, sub cars, EV's and long lasting goods.

I would be investing in ocean shipping any time!

Jul 26 06:19 PM

[Value Added:]

It's questionable that the continued strong growth of the Chinese economy, in light of the world slowdown, is real growth. More likely it comes from central spending of reserve dollars. Your point is well taken and contributes another consideration to a growing case for moderating investments in Chinese markets.

Jul 26 09:21 PM