Chanos Shorts China → Washingtons Blog
Chanos Shorts China - Washingtons Blog

Monday, November 16, 2009

Chanos Shorts China

Famed short trader Jim Chanos thinks that China's economy has real problems and is overvalued. He's therefore shorting China.

As Politico writes.

Now, Chanos says he has found another “trust me” story: China. And he is moving to short the entire nation’s economy. Washington policymakers would do well to understand his argument, because if he’s right, the consequences will be felt here.

Chanos and the other bears point to several key pieces of evidence that China is heading for a crash.

First, they point to the enormous Chinese economic stimulus effort — with the government spending $900 billion to prop up a $4.3 trillion economy. “Yet China’s economy, for all the stimulus it has received in 11 months, is underperforming,” Gordon Chang, author of “The Coming Collapse of China,” wrote in Forbes at the end of October. “More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent.”

Chang argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.

Another data point cited by the bears: overcapacity. For example, the Chinese already consume more cement than the rest of the world combined, at 1.4 billion tons per year. But they have dramatically ramped up their ability to produce even more in recent years, leading to an estimated spare capacity of about 340 million tons, which, according to a report prepared earlier this year by Pivot Capital Management, is more than the consumption in the U.S., India and Japan combined.

This, Chanos and others argue, is happening in sector after sector in the Chinese economy. And that means the Chinese are in danger of producing huge quantities of goods and products that they will be unable to sell.

The Pivot Capital report was extremely popular in Chanos’s office and concluded, “We believe the coming slowdown in China has the potential to be a similar watershed event for world markets as the reversal of the U.S. subprime and housing boom.”

And the bears also keep a close eye on anecdotal reports from the ground level in China, like a recent posting on a blog called The Peking Duck about shopping at Beijing’s “stunningly dysfunctional, catastrophic mall, called The Place.”

“I was shocked at what I saw,” the blogger wrote. “Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. ... There is simply too much stuff, too many stores and no buyers.”

1 comment:

  1. GW, as usual you post good stuff. I have been building on my own bearish case on China. I have been reading Michael Pettis, Andy Xie, Ambrose Evans Pritchard and others and using my own knowledge, which is a combination of education and experience to come to the same conclusion. I believe the entire economy of China is building more capacity and little else. This means their capacity is growing, not their output. Xie wrote a post about 4 months ago on the Chinese housing industry, which had some very telling statistics. He said there was 2 billion square meters under construction and that the typical per capita consumption of housing was around 28 sq. meters. That is about 300 square feet, meaning a family of 4 would occupy around 1200 square feet. That isn't exactly cramped, even by American standards, as I know a lot of people that grew up just that way. They used to call that middle class in the 1960's. In any case, he said China would need 8.4 billion square meters and was constructing at the pace of 1.5 billion a year with the 2 billion under construction and land developed for 2 billion more at this time. After the 8.4 billion feet, the gig was going to be up and demographics were for a shrinking population going forward.

    The question is, what are 300 million more Chinese going to do, make crap for the US consumer? Manufacturing is so automated that I would guess 300 million of any group could probably make crap for the entire world. The entire auto industry is probably no more than 10 to 15 million employees worldwide.

    In any case, the steel, copper and concrete industries hit a brick wall once the housing bubble stops and so does the financial basis for owning the properties. In any case, the state owns the land and the property is under lease for 50 to 70 years, so the stick of TNT becomes a dud black cat.

    So we have a recovery built on an economy that is built on building capacity that can't be used funding countries that are supplying commodities to build more capacity. Also, I doubt 30% of the warchest of funds China claims are trade surpluses and instead impounded foreign investment. China is using a jawboning down of the dollar to front its own devaluation tactics. Ben B is going to be forced to defend the dollar at some point as the US bond market is going to start walking away from him otherwise. You can only depreciate bank paper so far on the current basis of a 1% or 2% interest rate differential.


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