Chanos still short everything China

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By Leith van Onselen

Below is an interesting PowerPoint presentation from Jim Chanos, founder and president of New York investment company Kynikos Associates, which accompanied a speech Chanos gave at the 2013 Wine Country Conference on 5 April 2013. In the presentation, entitled “China: The Edifice Complex”, Chanos covers, amongst other things, Chinese banks, corruption, housing, infrastructure, debt, and rising wage costs.

Chanos is one of the original China bears, having first warned of China’s growing housing bubble in 2009, and in early 2010 famously described China’s fixed asset malinvestment and manufactured growth as “a treadmill to hell”.

It is also worth viewing Chanos’ recent video interview on Yahoo Finance’s Daily Ticker, which was given in the margins of the Wine Country Conference. According to the interview:

  • China is adding the equivalent of $2.5 trillion of new debt annually;
  • 30% of China’s GDP growth depends on new credit creation—half outside of normal banking circles;
  • China’s excessive credit creation is invested in the wrong sectors;
  • Every new dollar of debt created is yielding less growth in GDP;
  • China’s credit bubble and property bubble are inter-linked;
  • Any country selling into China’s construction boom will be adversely affected (especially Australia), via the negative impacts on iron ore and steel producers, etc.
  • Chanos remains short pretty much all of the companies exposed to Chinese construction (presumably including Australian miners).

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Jim Chanos CHINA PRESentation for Wine Country Conference (April 2013)

Leith van Onselen
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Comments

  1. I have been slowly revising my “disaster China” opinions. There are ways the Chinese are coping and might be going to cope, with their massive economic distortions.

    I think “greater sucker” investors are going to be completely suckered. The famous Chinese middle class savings have been recycled back into further urban growth by a cunning CCP. The middle class investors will lose everything. But the economy does not have to fall over because of this.

    The over-supplied buildings and infrastructure will get utilised at rents that those being lifted out of poverty can afford, once the prices have unwound a bit at the expense of the greater suckers. Meanwhile, the capital gains banked by the CCP at the expense of greater sucker investors, might have been spent wisely. It is kind of like a de facto Henry George land tax scheme. But the “tax” has been paid by greater sucker investors.

    This is surmise on my part, but if it is true I would like to meet the economic thinker in the CCP who devised it.

    If it is not true, then the capital gains furnished by the greater sucker investors have to be somewhere – are well placed CCP members salting it away in Swiss back accounts? Or living high on the hog? Any evidence?

    • notsofastMEMBER

      You want to meet the economic thinker in the CCP?

      I want to meet the energy thinker in the CCP who designed the Chinese Energy policy. Creating a system that is now hoovering up 4 Billion Tonnes of Coal per annum can only end in tears. But it isn’t the pollution that concerns me, so much as China having the resources and infrastructure to economically supply this much coal to where it is needed.

      Demanding greater and greater output from its coal mines, with little regard for cost, as the mines go deeper and deeper will be as much of a problem as having to move coal by rail from mines that are further and further from where the coal is used. Again with little regard to cost, no doubt.

      • You might be right if they are over-riding markets and price signals in all this. But generally, coal is the prime energy source for a “developing” economy.

        Coal-fired electricity generation actually represents an advance on local burning of coal for heat and energy, because the efficiency of the large furnaces is much higher, combustion is far more complete, and particulate emissions can be reduced almost to zero. The British government widely promoted “coal by wire” in the 1950’s to get people to take out their wood and coal fireplaces and use electricity instead. This is what solved the killer London smogs that were still lethal into the 1950’s. The same goes for industrial on-site burning of coal versus electricity.

        Hopefully developing countries can move more rapidly to cleaner energy sources than our own nations did. We really blazed the trail for them. In many features of the modern economy, they can leap directly to modernity. They need not ever have anything as polluting as the Model T Ford, for example.

  2. Chanos
    Chinese wages are up
    –Private sector manufacturingpay up 20% in 2011 and 16% in2010
    –Minimum wages continue to rise13% through 2015

    Lucky that has nothing to do with us!!

    RBA? Treasury? Anyone taking any notice of what lies in our future?

    Amazing though! It’s a bit hard for China to win. All the Western economic know it all know better than China and tell it to reorient its economy towards more domestic consumption. Then we criticise the very policies the Govt is using to achieve that aim.

  3. Chanos
    “Generational investment:Parental savings funding purchase of real estate by next generation”

    A bit the opposite of here where we boomers have used what is going to be the forced saving of our children to fund our RE purchase.

  4. China is a very, very simple equation at the end of the day – the investment in real estate by the middle class and massive credit / debt bubble along with it in the shadow banking relies EXPLICITLY, absolutely on the realisation of capital growth from these purchases.

    That is the equation that everything rests upon.

    Chinese investment in real estate is NOT about providing a home, it is NOT a consumer purchase, it is NOT about rental yields – it is 100% investment for capital growth.

    Now that means that everything, the entire Chinese economy is resting upon the simple premise that all these builds can be on sold at a profit, and there is the catch.

    This can never, ever happen. The entire middle – upper class is hocked to the eye balls – while the vast majority of China, over 80% is well below the 300 million middle class and could never afford any of this housing so how long will this last with no re-sales ? One, two, three years ? Five ?

    These apartments are being built for nothing – It’s China – but are 30, 30 times income rations relative to Australia. The entire thing is clearly, undeniably based on speculation and artificially inflated prices and not on any scarcity, land supply or red tape (lmao).

    What’s more these builds have ten maybe 15 year life spans – they are shonky as shonky gets.

    Basically these builds are destined for write off – there can never be any yield on these builds.

    Astonishing.

    .

    • “..how long will this last with no re-sales ? One, two, three years ? Five ?”

      What do you say are the factors that will precipitate wide-spread forced sales?

      • Or to put it a different way…what allows large numbers of investors to buy and hold chinese res prop vacant without yield?

    • Giordano, Patrician; I know what you are saying, your analysis is correct, and I have recently concluded what I said in my comment at the top of this thread. The greater sucker investors in empty apartments are going to get wiped out and there will be no bailouts or redress for them. They have kindly funded a whole lot more expansion that ultimately will be to the benefit of those still being lifted out of poverty.

      Prices will come back to an affordable level and the empty properties will be filled. Meanwhile, the capital gains taken off the middle class property investors has probably been invested in much of the surplus urban growth – not just blown on consumption and finance sector bonuses. This is like an ultimate wealth redistribution scheme in a developing country. Instead of those out of poverty the earliest remaining above a glass ceiling, their wealth has been garnished to provide for those still being lifted out of poverty. Instead of an explicit “tax”, it has been taken off them in the form of “bubble value investments”.

      If I am wrong about this, my earlier belief that China was heading for the mother of all meltdowns, still holds. I am just surmising now that a cunning CCP strategy could be working as I describe and this could be “all under control”.

  5. Its nice to MB write something about Chanos. I follow him and read about him alot. Everything he has been saying is starting to unfold. Just like he said about Enron.