CHANOS: CHINA IS THE NEXT ENRON

James Chanos of Kynikos Associates says China is the next Enron.  Of course, this would sound ridiculous if Chanos hadn’t been one of the original people to uncover the Enron scandal.  Chanos is a master short seller, accountant and hedge fund manager. He essentially believes the Chinese economy is one big government run ponzi scheme. He thinks it will end very badly:

Source: CNBC

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • svg

    “I didn’t work at Enron either”. lol. Great comeback.
    Right or wrong, Chanos is a pleasure to listen to.

  • http://www.pragcap.com TPC

    I agree SVG. He is very reasonable. Which is part of what makes his remarks on China so frightening….

  • asha101

    many people are fooled by Yuan. Just because many of the chinese workers are undervalued, it does not mean that the chinese Yuan is undervalued. There’s a significant difference between the two. The more people believe that Yuan is undervalued, the more people will invest in Yuan which result in more foreign reserve, more construction, more GDP for China. The ever increasing foreign reserve will then make the Yuan look more undervalued.

    China is just like U.S. during the tech bubble. A lot of money flow in, no money flow out. The Chinese bubble will be many times bigger than the tech bubble because the chinese government will try everything to keep the bubble from busting. The chinese government controls the media and has way much more power than U.S. government. They have every number to justify that the economy is healthy and there’s no bubble.

    Just imagine during the tech bubble, there’s a giant force that controls everything and guarantees that the earning report will always beat estimates and the earnings will always increase 10-20% a year. That’s what’s going on in China.

    China’s bubble will probably continue for many years until a lot of foreign companies start to see decling profit in China, but again the chinese government is fully aware of that, they will try to keep the foreign companies profitable. The chinese government is watching every piece of economic information you can see. They do want things to cool down, so you’ll see negative news from time to time, but definitely nothing that can be bad enough to cause massive foreign capital retreat.

  • stpepper

    The problem I see with China is that a lot of shenanigans are masked/tolerated just because they are putting out 8%+ GDP growth. Last time I heard Chanos talk he was just stating that his thesis was only about Chinese real estate. But I think he was just being diplomatic. Should real estate collapse in China, all the malinvestment and corruption going on in China right now will be exposed. A lot of funny things that are tolerated now won’t be. Just think of subprime 2007.

    -Corruption is ok, because at the end at least you get your part of cut, you just have to keep quiet about it.

    -The fact that your margins are razor thin and your books are cooked is also ok, because the land your factory is on is increasing in value. You figure out that if things get bad you’ll make a killing selling the factory.

    -Wall Street doesn’t care too much because stock prices are climbing so, why worry about the books?

    -State capitalism is ok too, because it gives us 8% GDP growth, nevermind much of it is mal investment and involves tearing down perfectly fine buildings to make room for new ones.

    -You’re ok with empty apartments that generate no income because the land is increasing in value.

    -Borrowing tons of money from your friends and family and the going to the bank to use that as a downpayment and lie about your income is OK too, because property will never fall n value.

    etc etc etc. I think that if property falls a lot of problems will follow.

    A lot of people will lose their shirts. But because these guys are from the government, it will be the common man in the street that will bear the brunt of the slaughter.

    The way I look at this is one of two:

    1)China is this once in a lifetime event, Chinese leaders are the smartest guys in the planet and despite all the ugly metric saying it’s a bubble, China will be alright and going to new highs.

    2)It’s a bubble and this time isn’t different. We’re in a waiting game to see when this pops.

  • goodfriend

    Chinese state is long one option: developping internal demand. 90% of their population is poor.

  • B Ferro

    I’d like to run a scatter plot of quarterly Chinese GDP growth over the past teem years and compare the dispersion and standard deviation (or lack thereof) to the catalog of all other countries throughout history…

    Has there ever been a country that has grown so consistently in such a narrow growth range?

    While nobody believes their numberers, such an analysis might evince this point factually

  • VCC

    Frightening that Jim Rogers has such a sharply dissenting view on China. He has come out and emphasized that he believes China is no bubble. I don’t recall the last time Jim was wrong on a major macro issue.

  • Artesian

    Wrong, if you monitor basic commodities like lead that have no ETFs or hedge funds distorting their spot value you will see the true driver of the real economy is China.

    This is not another Enron. China has acquired and is continuing to acquire more of the sources of base metals, and the ‘means of production’,and has become the largest gold producer while the rest of you produce your infalted paper. You had better get the NGOs out of mining soon or commodity infaltion will leverage polite society to its doom.

  • prescient11

    He’s always a great listen and sounds like a good guy.

    His problem is that China is sitting on a massive war chest and I think he’s misguided in thinking that this market is like Vegas or Miami. First, down payments in China are still substantial (although not as high as they used to be).

    Second, while perhaps they are building buildings just for the hell of it, they sure are not doing that with power plants and they are building those at a rapid pace. I expect this to continue at a minimum for 5 years and most likely 10. Same with India, although their demand for raw materials will come online a little bit later.

    Asia is regaining its normal GDP ratio, and urbanizing huge populations, strain on natural resources and food stuffs will be high. It’s a game that is going to be played until it isn’t, which for the forseeable future should be a super bull cycle for all things commodities, imho.

  • HumbleGrizz

    From a fellow Greek American, yet!
    THIS is a very bad call and a very stubborn man..forget contrary this and contrary that – his sun will set. Chanos is not that smart a man…

  • John12

    I was in China from June to August. I don’t believe Yuan is too much under value. I went to many stores and calculated based on current exchange rates from Chinese banks.

    For electronics, prices in China are mostly higher than in US.
    For groceries, prices are ranging from 50% to 78%.
    For houses, prices are about 50% to 110% as in US.
    For cars, prices are 150% to 200% as in US.
    Household incomes are about 1/12 as in US.
    The Chinese are actually paying more than us for living.

  • PS

    Chanos is blind. I live in Hong Kong and can tell you that China is in no bubble.

    The debt levels in china are miniscule, they have a massive savings rate, the economy is growing by almost 10% a year and domestic consumption is soaring.

    Where is the bubbble? Jim Chanos is a China basher; he knows nothing about China

  • billw

    Anybody that has access to Youtube videos on all of the literally empty cities that China has built knows that China is in a bubble. Chanos said that about 60% of China’s economy is in the real estate development ( building) sector. Jim Rogers has said that China has a problem in this area, but he believes that they can handle whatever short term crisis comes out of it better than the US did because China has so much more potential for growth. Rogers even said in an interview just 3 months ago that he was not placing any money in China at this time for that reason. He said that there are other areas nearby that currently have better potential.

  • stpepper

    Jim Rogers is talking about the long term. And over the long term, China’s case seem pretty good. I mean, how wrong can you get when you have 1.3 billion people? They just need to have 1/4 of the average income per person to get even with the US. And also, the Great Depression didn’t stop the US from becoming a world superpower.

  • stpepper

    Nope. There is a lot of leverage, just hidden. From what I understand a lot of people are borrowing money from their families and friends just to make the downpayment on the house, then lying about their income to the bank.

    Hey, of course, there is no paper saying you owe that debt to them, but it’s leverage. This money has to be paid back. This money is the money their parents were saving to use for retirement and for whatever medical expenses they have. Are you going to tell your parents ‘hey dad, mom sorry, I don’t have money to pay for your retirement’. No way.

    Imagine what will happen if China stops growing and has to lay off a lot of people. Suddenly you have these people that have to pay for their parents living expenses, medical bills, standard living expenses and on top of that they might lose their house if they don’t pay the bank back and then the bank will chase them for the difference.

  • PeterGriffin

    It was different in 2000 because the internet was creating a whole new way to do business. It was different in 2007 because you can’t lose money in real estate. It is different this time in China because the economy is growing at 8%, debt is low, etc. It is never different. No one ever learns from history. I don’t know about you, but I would rather not invest my money in an economy where there is no way to prove any of the numbers are accurate. A country that builds megamalls that no one shops at, millions of units of housing no one lives in, entire cities without residents is living on borrowed time.

  • PeterGriffin

    Sounds like you are describing Japan in 1989.