CHANOS: I AM NOT BEARISH ENOUGH ABOUT CHINA
Via Bloomberg TV:
Chanos on critics saying his position is wrong on China:
“Lately, I have been taking a beating from some Chinese real estate developers including one very recently…These kinds of criticisms, these ad hominem criticisms are fine, but what people again don’t seem to be attacking are the facts. The property developer stocks that we’re short have been declining. This has been a good place to be short for the last 18 months. I guess we can rest on that.”
“Actually, our team just got back from China, my research team.”
On reports that Chanos does not visit China:
“I don’t ever talk to companies or CEOs anyway. I have not for 25 years…I think that what my team found [in China], they actually came back saying we are not bearish enough.”
“The signs of overcapacity were much even greater than their last visit, which was late last year. Increasingly, the executives that they met with were sounding a little bit more uncomfortable about the current situation.”
“If you look at the balance sheet of the developers that claim they are pre-selling…If you look at the balance sheets of the developers, you’d be hard-pressed to see how healthy they were because they are all loaded up with land, just as our developers were at the top of our market. So for every yuan that they are earning presale, they are plowing it back and then some into new land development. They are drinking the Kool-Aid, so to speak.”
On whether Chanos changed his position when his team claimed they weren’t bearish enough:
“We’ve maintained our pretty much dramatic overweight in our Chinese shorts, and we will leave it at that.”
“What we are seeing now is more cracks on the façade and what they observed, almost quite literally. The buildings that were only two to three years old were already beginning to show some signs of wear and tear…The quality of all this fixed asset construction is becoming sort of suspect.”
On whether the yuan would indeed appreciate if it were not pegged to the dollar:
“I think this is actually one of the reasons contributing to the bubble in that it is a double edged bet that could turn into a double-edged sword. Investors are counting not only on asset appreciation of fixed assets in China, but they’re counting on the yuan being revalued upward. If it ever became apparent that might go the other way, you could see a real scramble to get out of these assets in China.”
On a 13F filing showing that Chanos is long on shares in Chinese real estate:
“We have a hedge fund. We have a small, long short opportunity fund, which is a fraction of the size of our total holdings, and in that fund, we hedge off everything. We were short a bunch of developers, individual developers. We hedged it off on the long side with an ETF. We are not bullish. We’re just hedging in our hedge fund.”
“In our hedge fund, which is a small part of our assets, a couple hundred million, less than 5% of our assets, we have longs and shorts. To use the China example, not only are we hedging with the ETFs on the long side, but we own the debt of some of the developers against short positions in their stocks…Increasingly, the real estate developers can’t get bank loans for their project financing in China. They’re now going into the Hong Kong market to raise money in the bond market at very, very high rates, as high as 15%, 20%.”
On whether Chanos find it difficult to short stocks such as in the IPO of RenRen:
“That’s the problem in any IPO, so we stay away from that because you can’t borrow them.”
“But that also goes to show you why you need short sellers in the marketplace sometimes to produce price discipline when things get out of hand on the upside. When you can’t borrow the shares, you get an important group of investors who are willing to risk capital to say this is silly and can’t participate. Typically what happens is as soon as these stocks become borrowable, that’s when they go down.”
On the U.S. market:
“We are not finding that much [interesting]. We owned a lot of fixed income securities back in the end of 2008, early ’09. Now it’s also more passive hedges on the long side, versus active shorts in our hedge fund…I think as every month goes by, we’re finding more and more to do in the U.S. market on the short side. That wasn’t so much the case a year, a year and a half ago.”
On the tech market and other US stocks:
“[The tech market] today, it’s not like ’99 and ’98. It is different. As I said, the bubble is really on the other side of the world….I’m not comfortable with it, I would never own [LinkedIn].”
“The Chinese is our biggest area, people know that. We’re still in the for-profit education area, broadly speaking. We think that has not played out yet…In an era of looking at budget austerity in the U.S., I can’t believe that when staffers in the House and Senate look at how much these companies are costing taxpayers in terms of student loan defaults, they’re not going to look at it through a different prism.”
“We covered most of our healthcare shorts after we looked at the healthcare bill, which I think was a bigger lost opportunity for Washington than the financial reform…When it was all said and done, the sausage that came out of the grinder was in fact an enhanced coverage bill that was going to increase costs.”
On the Europe debt crisis:
“Obviously, as market participants, we have to pay attention to it.”
“I think this is all about trying to protect the valuations by largest European banks have on their sovereign debt holdings, and at some point, the voters in these countries are going to figure out that, in effect, their taxpayer dollars in western Europe are going to support the banking system, much like ours did a few years ago.”
On the debt crisis in the U.S.:
“Our situation is much different. We are a reserve currency country which gives us tremendous flexibility, and that helps us to an extent like no other, and our situation is certainly more agile than Greece and some of the other ones, but having said that, the long-term picture for our country is dismal if you look at our accounting.”
“We realize we are pessimists. Submissions are going to be left to somebody else, but the problem is health care spending. End of story. It is health care. Health care is the lion’s share of our unfunded liability. Unless we get control of health-care costs, which continue to grow, I just saw some numbers last week, 6% or 7% above the real economy, we are going to be consumed by it. At some point, something will give on that front.”
Chanos on Meredith Whitney’s muni call:
“We were talking about munis a long time ago. What Meredith said, the old saying is that you can predict one or the other but not both. Having said that, I think she underscored at a time when there was a lot of complacency, particularly a lot of retail investors who do not do their own fundamental work, and they hold a myriad of different obligations, and they really do not know what they own. At the time that she spoke, which I believe was October or November of last year, spreads were very, very tight, and people were not being compensated for the risk that they took. So in that respect, I think she did the market a favor as much as she was crucified by others for saying that, but I read her report and I thought it was brilliant.”
Admire that Jim is man enough to admit he’s underwater on some positions.
But I have to wonder whether the “free market” mechanism exists in China to cause a massive correction? You can talk all day long about the malinvestments in China, but what will be the catalyst when the Chinese govt IS the market? Am I making any sense here?
Critics who attack Chanos do it from afar. He’s too scientific to challenge face to face. He’s a “just the facts” man. As he says in this interview, meeting or getting to know the CEO of a company might influence his analysis. No room for the personal side of a balance sheet.
Agreed – Chanos is certainly a publicity junkie but he’s not an idiot. He takes the task of mamaging billions in other peoples’ money seriously and his views and positions are well-researched and not just aimed at making headlines.
To everyone who doesn’t agree with him – that’s fine…but you’ve gotta explain why he’s wrong. Don’t just re-hash the weak arguements of farmers who want to live in city apartments or its all a well-managed grand plan. If Communism is so great and efficient, why aren’t there more thriving communist nations?
Copper… Copper… COPPER!
I could have saved him the cost of going to China to find out about the over construction, and shoddy work, and inability to refinance. It is all over the web: Photos, documentation, news articles…all you have to do is put it together.
I am not surprised. Chinese moneysupply was about +29% whereas US moneysupply was a “”mere”" +9%. In combination with the inability to move those yuans out of the country meant that that money had to be invested in China itself. With the current investment bubble as a result.
See also this link (from Mike Shedlock):
http://globaleconomicanalysis.blogspot.com/2011/02/speculation-investment-scandals-fraud.html
Similar story about chinese railroads.
hard to pick a bone w/chanos.
Chanos is probably right but no one, not even the best, can predict the timing of a bubble pop – especially when the bubble is propped up by a totalitarian government. The powers available to such a government are truly extraordinary and should never be underestimated.
Chanos will get his butt fried in soy sauce – Chinese real estate is overvalued but he is dead wrong about China’s long term economic prospects.
China is the future.
Paul, i don’t thing he shorted chinese GDP. He shorted certain stocks
And if communist command economy is the future I regret not being “raptured”. LOL. China is the future the same way Japan was the future in the 80′s.
China is hard to get a handle on because they are not like us. We humans tend to map our reality onto others, which is an error in thinking.
China does have debt money creation via their private banks. China’s state banking authority does have a lot of control over their private banks via reserve requirements. For example, when there are too many Yuans in the money supply, we often see China mopping them up by making reserve requirement high for their private banks. China also can move quickly and put a stop to speculation. For example, in some areas, you can own no more than one house.
Another thing China does is asset swaps, like our Fed is known to do (QE1). Remember all the bad communist debt from the 90′s? That debt suddenly disappeared when the State banks transferred the communist debt onto their banking books. The communist companies became debt free, and the debt disappeared down the memory hole. The books looked good though, especially to the West. The State companies were then gradually turned free into the market.
China also uses their state banks to spend directly into companies. They give direct loans, and then forgive them at some later date. In other words, companies in China can have debt on the books, but it is just numbers on a dusty ledger. The extra Yuans do enter the economy and can cause inflation, but the idea is to grow the economy at a rate faster than the money supply increase.
China also pegs the Yuan against the dollar. For extra dollars tha enter the Chinese economy, they are traded out for a Yuan. Those dollars typically vector back to the U.S. as a treasury bill, putting American in debt and removing excess dollars from circulation (supply and demand, so dollar supply is reduced driving up the value of the dollar and reducing the Yuan by comparison.) The downward pressure on the Yuan helps maintain the peg in the targeted window.
China’s real strategic goal is to suck jobs and industry out of the West, and hence drive up the wealth curve in one generation. They have to do it due to their upcoming demographic inversion.
Once world class industry is in place, then it would be a simple matter to turn on intenal consumption. In the U.S. we did the same after WW2.
Don’t get me wrong, I’m not a fan of state banks. They can be used for Fascism or Statism or Communism. I am a fan of private banks, but with nationalized money. The money itself should issue debt free from the Government. The people and their private banks and private market system should pick winners and loosers. Banking is not a function of government. But issuing money is a function of the government and the law. Private banks should not issue new money.
We need to step up and reform our money system to withstand the challenge of China’s state banking money system. People that claim China is going to fail anytime now should take a closer look. The challenge posed by their system is serious.
But Ren,
How sustainable is all of this? How long can you maintain a pegged currency and ever increasingly higher rates of inflation before the wheels come off?
Chinese inflation is – comparitively – low. If they would cut the peg then the Yuan/USD would take a (severe) hit. So, the peg actually shields China from (much) higher price inflation.
When (not if) the Eur/USD goes down dramatically (AGAIN) in e.g. the second half of 2011, then the chinese exportmachine will be severely hurt and will come on top of this chinese real estate bubble. What do you mean by inflation ? No, China is – IMO – on the cusp of (hyper-)deflation, as well.
Even a guy like Hugh Hendry has talked about this on a number of occasions. He shares Chanos’ view. And a number of other renouned money managers share Chanos’ view as well. Although there’re still a lot of China kool-aid drinkers out there.
Is China the future ? Well, that remains to be seen. But for the next, say 6 to 12 months the direction of the chinese economy is clear. And it’s going to be ugly, over there, as well. But developments in China WILL have a worldwide impact, even in the US.
Now I quote chairman Mao: “”Spare me from interesting times”". (This refers to the chinese saying/curse: “May you live in interesting times”).
L i… P..u
I wouldn’t believe a guy who has never been in China on his Chinese economic opinion. I have been in and out there for every 6 months for 9 years. Chinese economic is still very strong. The demand on goods doesn’t see much dropping.
I think he is going to lose lots of money on his wrong bet.
Clearly you haven’t been to one of the ghost towns / ghost malls. Why should you? There’s nothing there.
He hasn’t lost any money so far and he has stated that he sends people to China regularly, he doesn’t go himself which I think is part of his method as a way not to get influenced by superficialities.
Cullen, sorry I didn’t answer your question earlier. The answer is, it depends. They can have inflation and the wheels can come off if there is debt and mal-spending.
We destroyed a lot of war materiel in WW2, yet our economy did ok after the war. The extremently low rates and direct investing was a lesson learned and then lost. I don’t like State Banking, but if it is done right, it is a serious weapon. It is a serious threat and many economists are confused by China because it is off their cognitive map.
Canada’s state bank between 1932 and 1974 built the third biggest Navy, a national railroad, waterways; they had free health care, land grants, and people went to college for free. By the early 70′s industry had so much savings, they started to self finance.
Much like our WW2 tanks and planes, ghost towns and malls in China are OK if they don’t incur debt. I think most of the housing there is debt money, so it would be bad. But, much of China’s economy is direct investment by one of their four state banks. If somebody has access to the data, it would be interesting to see how the ghost towns were financed.
A Chinese business can carry big debt loads and still go on for years. The government often forgives the loans. So, this should be inflationary, but it is not if you end up capturing an industry in order to make a bundle of profits later on. I call it state mercantilism.
Also, pegging the Yuan and keeping dollar reserves high prevents Western banking bear raids. The Chinese learned their lesson during the asian debt crises, so I predict they will never allow the Yuan to float. Raiders can’t get through the peg, and if they could they would encounter plenty of reserve dollars backing up the Yuan. There could never be a raid similar to what Soros and big banks like to do.