Chanos: China is getting worse

By Leith van Onselen

Following on from his recent PowerPoint presentation at the 2013 Wine Country Conference, Jim Chanos – founder and president of New York investment company Kynikos Associates – on Wednesday gave the above video interview on CNBC where he summarised the key risks facing the Chinese economy and why he believes the economic situation there is getting worse.

According to Chanos:

Chanos: “I actually think it’s [China has] gotten worse. what’s happened more recently after the new party leaders took in, was another burst of investment.┬áBut more importantly, another burst of credit expansion. And what really has us concerned now, you have credit actually accelerating in China. But GDP growth is still slowing. In the last quarter, China pronounceded some staggering numbers a couple weeks ago. New credit outstanding jumped by $1 trillion US. Now this is an $8 trillion US. economy. So on an annualized rate, that’s 50% GDP of new credit creation. And to put that also in perspective, total new credit globally went up by $1.5 trillion in the first quarter. China is $1 trillion of that, yet only 10% of the world economy. So there is a credit bubble that’s actually not only huge, but getting bigger.

Presenter: “How do you trade? What do you look for? What are your positions to take advantage of that?”

Chanos: “Well, one of the things we have talked about historically is being short booms that go bust. And I’ve always defined that very strictly in that you look for asset inflation where the asset being inflated by credit does not serve — does not generate cash to service the debt. so you get the so-called ponzi finance moment. And that would be almost anything related to real estate or construction in China. So property companies, cement companies, steel. And then, of course, companies selling into that, that bubble. Iron ore and mining. That sort of thing. So inexorably, you can’t keep growing your credit at 50% of GDP. Something is going to give. When? I don’t know. But it has been a pretty good place to be short as we were talking about before the show.”

Readers interested in a more detailed examiniation of China, as well as Chanos’ broader views on investing and the state of the markets, are encouraged to watch the extended video interview (12 minutes long).

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Leith van Onselen

Comments

  1. This guy is going to come out being a champ on all that he has been saying. Very good point that they are driving up credit but GDP isnt going up. Guess the minebots will spin this some how.

    • GunnamattaMEMBER

      He has nads of steel. Hes been saying this since circa 2007 and kept it up all the way through the largest economic stimulus ever seen.

      But he has got some good points, and they have never gone away.

      • notsofastMEMBER

        But I think Chanos is wrong. I cannot believe the US economically impaled itself to create China just to see it all fall in a heap. It doesn’t make any sense because there is no sensible next step for the world if this happens.

        Given the Chinese physce, the Opium Wars and the total failure of China’s last attempt at globalisation with the Open Door Policy, it would take another century for China to reemerge to try and engage the world again. But the world needs China NOW in more ways than you would think from a purely economic view point. Just to spell this out to you, not only does the world need China economically but it needs it culturally, it needs it ethnically and it needs it socially.

        I would be listening more to the likes of a very eminent Australian economist who recently put forward his views on the coming Chinese correction than Jim Chanos.

        • Chano’s views are very specific to the Chinese property market. He’s not saying China is going to implode forever.

  2. Chanos points out that total global credit grew by $1.5 trillion, China 10% of global GDP accounted for $1 trillion of that debt expansion. Mmm!

  3. Chanos is great as usual but does anyone else think that theses CNBC “reporters” are a joke? Everyone time Chanos comes on and lays out some analysis, you can just see their eyes glaze over and then they always ask the same things like
    1. what are you trading
    2. what positions do you have
    2. omg just give me the ticker numbers

    Everytime they ask the same sh*t. I’m sure everyone would prefer if they just say “heres Chanos for the next 20min”.

  4. Ronin8317MEMBER

    The current situation in China is not sustainable. The issue is not whether it will go bust (it will), but what the Chinese government will do in response. We’re talking about China : anything is possible. They may decide to “print their way out”, let the Chinese Central Bank buy up all the debt, while imposing capital control to manage the RMB devaluation. That will be the nightmare scenario for anyone shorting Chinese banks, as the stock market and inflation shoots through the roof.

    • notsofastMEMBER

      I agree what China is currently doing is unsustainable.

      And the most unsustainable part of China is the huge amount of coal they are using. If they have an achilles heel this will be it.

      I believe of the financial front, on an over building front, the people who control the may tens of trillions of dollars in offshore tax havens around the world will be very forgiving of China, if for historical reasons more than anything else.

      But if China runs out of energy, if it runs out economically available coal, that is something they will find impossible to remedy.

  5. I am surprised that we have very few blogs about this. Chanos is a very accomplished shorter. He shorted Macquarie Bank at $70 cleaned up . He has Fortescue as a short cleaned up and still holds his short.
    He’d be short our banks but the yield is costly.

  6. Funny, every country abusing this global fiat money system goes down the same road eventually. First Japan some 20 years ago followed by the US/Europe since 2008. China is trying very hard to break every record timewise, as it tries to grow rich before it grows old. It will end up in the same debt based monetary trap, producing a vast amount of mal investments and other imbalances along the road. Especially environmental imbalances. I do not agree with the man made global warming religion, but I do recognize plain water, air and soil polution. And I certainly agree with Mr. Chanos views. This will not last much longer as China is already experiencing diminishing returns. People familiair with the dutch language should read the following article regarding our money system: http://www.economie-macht-maatschappij.com/geldsysteem-faalt.html