Via Bloomberg TV:

Billionaire short seller Jim Chanos, founder of hedge fund Kynikos Associates Ltd., spoke to Bloomberg TV’s Betty Liu this morning about China’s banking system and outlook for the Chinese economy and real estate market.

Chanos on his recent trip to Hong Kong and Australia:

“I think we probably came back a little bit more bearish….Our concerns about what we saw in Australia: an economy clearly tied to China has hitched its wagon to the tail of the tiger. In terms of the general complacency, what we heard over and over from investors and clients and potential clients is, ‘yes, yes, there are some excesses, but the government will figure out a way. That the government is this all-knowing, omniscient basic entity that will not prevent me from losing money.”

Jim Chanos whether the Chinese government has money:

“[The Chinese government] doesn’t [have money], and that’s the problem. The banking system in China is extremely fragile, and that’s one of the messages we wanted to get to people.”

“In fact, because what happened the last two crises, in ’99 and ’04, when non-performing loans went crazy in China without even a recession, the Chinese banking system was not re-capitalized like ours was, it was papered over. Going into this credit expansion, Chinese banks are sitting on lots of bonds from the so-called asset management companies set up in 1999 and 2004, and they are keeping them on the books at par, at full value. In the case of Agricultural Bank of China, which we’re short, those restructuring receivables are equal to over 100% of their tangible book. The Chinese banking system is built on quicksand, and that’s the one thing a lot of people don’t realize. When they talk about the foreign reserves of $3 trillion, what everybody forgets is there’s liabilities against that.”

“Everybody seems to think it is a free and clear open checkbook. It’s not. That is what we have been trying to tell people. Focus on the lending system over there, because everything occurs through the banking system.”

On the Chinese economy:

“Property prices and transactions are really beginning to decelerate. We saw that starting in August, that’s continued into November. Transactions are down 40% to 50% year over year in the tier 1 through 3 cities. Prices are down. In some cases, we’ve seen riots in sales offices, where people are amazed that prices could actually go down. There’s lots of indicators on the side. There’s a growing sense that the Chinese government will ease. We point out that credit this year will grow between 30% and 40% of Chinese GDP. If that’s tight, I’d hate to see it ease.”

On the scenario in which Chanos would cover his shorts in China:

“At some point, we will cover our shorts. [The scenario would be] a system where the banking system would have to be recapitalized again, most likely. You would see a flood of RMB in the system, and a realization that the growth by fixed asset model has got to change. Mr. [Stephen] Roach and others are convinced that the Chinese customers will pick up the slack. And at some point, he and she will. But the transition is going to be the real tough part. And right now, the consumer continues to decline as a percent of the Chinese economy.  That is, I think, flies right in the face of what most people think will happen.”

Source: Bloomberg TV


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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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  1. The difference is that some people are bullish long long term on China…. as Jim Rogers continuously points out. Chanos is bearish medium term.

  2. “Command ” economies are always inefficient allocaters of capital…not even an undervalued “reminibi” can change that forever.

  3. Yeah, a lot more room for da’ bears here… However, I chickened out and sold my sp500 jan 2012 1200 puts at 74 with the sp500 down about 1.75%. But my feeling continues to be this puppy is headed to 1100 or lower.

  4. Whoops. Sorry, had Flash turned off, didn’t see it embedded. Please ignore …

  5. Fair enough. Huge possibility of confirmation bias though. Like Chanos would go to China and return convinced of its potentially for success ;)

  6. Ah, those giant Foreign Currency Reserves. Predominantly in USD and invested in US T-bonds. These reserves are NOT meant to be used to help the economy. But they are meant to enable China to buy commodities (especially oil) which are priced in USD. Only in a case of emergency those T-bonds will they be sold. Like rising US interest rates or ……… Perhaps China is already selling ?

  7. China’s been reducing their holdings of US bonds for the last year. And to the shock of the world, the US bond market didn’t implode somehow. Gee, I wonder why that is? Could it possibly be that China’s bond purchases serve no purpose in “funding” the USA? Could that be it? :-)

  8. Good question. And I don’t have an/the answer. Perhaps US investors picked up the slack ? Moved out of stocks and moved into T-bonds ? Did the FED monetize more US T-bonds ? Perhaps investors consider T-bonds – for the time being – less risky than Bunds ?

    What I do know is that when China swaps those bonds for cash (in a checking account ??) and that money (money=credit) remains at the New York FED then it still benefits the US. Once the Chinese take that money out of the US and out of a US bank then the US will get hurt. But the Treasury – as a currency user – will sooner or later feel the impact of those bond sales. (higher interests rates). When ? Remains to be seen. But it will happen. Keep watching the charts !

    You have to understand that the Treasury+FED is not up against 300 million people (the US) but up against 7 billion people because the USD is the world’s reserve currency.

    Currently we’re in deflation and that means that most credit instruments will become worthless/worth less (even long maturity T-bonds). And the value of a T-bond going down is very deflationary (for the entire world).

  9. Yes ! That’s definitely it ! Dollars and Treasury debt are directly interchangeable…always will be too (as long as the US is a sovereign currency issuer).

  10. Can a dictatorship have an economic crash? I think they would need some supply or social shock. As long as China can trade low-cost goods for other goods that they have to import, then they could fake stability for a long time. Non-performing loans … ha! .. think of all the accounting gimmicks in the US to paper over the insolvent banking system, and we’re in a democracy. “Money” is free when you control the output of 1B people.

  11. The property sales decline was not due to no demand. It’s due to the government controlling the purchase. Only residents can now purchase a house in big cities and each family can only purchase one.

    Many of Chanos observations are correct, but the property sales decline is really not something comparable to the U.S. or Japan bubble. Chinese considers real estate the only type of “safe” investment. The government thinks there’s bubble, so they are controlling the purchase. That’s the real story

  12. Can we try and draw together some conclusions from the most recent posts on this website? I think there are a lot of smart people who use this site but there is no one place on it where they can actually debate the “fors” and “againsts” of particular trading ideas.

    eg, Cullen, you wrote a week or so ago that Bund yields seem too low relative to treasuries. That could have been traded – short Bunds and long treasuries would have been very profitable over the last week. If there was a place on this site where that trade could have been proposed and its merits debated, that would’ve been awesome.

    I know that everyone is always reluctant to make specific investment calls like that, but I don’t see any risk in doing so provided that you give the arguments in favour of the call, and ideally against as well, and allow people to debate them.

    Let me try and start:

    1. Short Bunds. The thesis is still the same – German yields at around 2% are a heck of a lot riskier than treasuries at 2% and we’re still in that ballpark. Can quite easily get this exposure by shorting Bund futures. Dec contract currently trades at 13560.

    2. Short Chinese banks – on the basis of the reasoning put forward by Chanos in the video in this post. Can get this via an exposure to Agricultural Bank of China, in which he is short. It currently trades at 3.18.

    3. Short Chinese property – again, on the basis of the reasoning put forward by Chanos in the video in this post. Not sure what the best way to do this is.

    What other potential conclusions can be drawn from the information recently shared via this website?

  13. Yes, they are interchangable. But when the chinese sell their T-bonds like they have done for a while then the Treasury will get hurt because the Treasury is a currency user and not a currency issuer. The only US currency issuer is the FED. And currency users (households, pensionfunds, corporations, Treasury, other government departments, municipalities, states) can’t “”create”” money, they have to generate an income. Through e.g. taxes, wages, profits, premiums, dividends, selling T-bonds, interest income (on e.g. T-bonds)

    And that’s why yields going lower on e.g. T-bonds reduces the income stream of investors.

  14. You will be broke if you short Chinese banks. “Don’t fight the FED!” You are fighting someone 10 times more powerful than FED. It’s much better to short Australia.

    There’s no way you can short Chinese property. You can short the builders, but their stocks are already down significantly.

  15. But the Treasury – as a currency user – will sooner or later feel the impact of those bond sales. (higher interests rates). When ? Remains to be seen. But it will happen. Keep watching the charts !

    You mean when the economy has recovered and inflation is picking up and the Fed decides to raise interest rates?

  16. No, the chinese seem to have reduced the amount of T-bonds they are holding. and that’s one (and only ONE) force pushing interest higher. No, the economy isn’t recovering. The FED raising interest rates is a myth. It’s Mr. Market that forces the FED’s hand.