Jim Chanos is one of the few people, along with myself, who has consistently made the argument that China is a massive bubble that will burst and that the bursting of the Chinese bubble will be extremely painful. China's bubble is built on massive government manipulation in the Chinese market. China is not a free market and as such huge distortions have been created to ensure GDP growth regardless of the quality and sustainability of that growth. The purpose of such a suicidal economic plan is to serve the political interest of the PRC establishment.
Chanos: China’s hard-landing has already begun China’s bust will be a thousand times worse than Dubai.
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NEW YORK (MarketWatch) — China is heading into an economic storm, and the much-feared hard-landing of the world’s second-largest economy has already started, warned celebrated hedge-fund manager and China-bear Jim Chanos of Kynikos Associates on Monday.
“The numbers are falling faster than we thought,” said Chanos during an exclusive interview with MarketWatch on the sidelines of the 7th Annual New York Value Investing Congress.
“Real estate sales in September and October, which are peak months, fell 40%-60% on-year,” he said.
Chanos also pointed out that Chinese financial and real-estate stocks are down 30% from their peak, while cement and steel prices are declining.
“People are buying into the idea of perpetual growth,” Chanos said. “But they have to ask, ‘Are you really growing?’”
Chanos stressed that investors should understand that there is no bailout without a cost.
“The only way the Chinese government can continue to bail out everyone is to print more money, which will lead to inflation. But people are depositing money [in banks] at below inflation,” the fund manager said.
Chanos had already suggested back in May that there were clear signs of excess supply in China’s commercial real-estate sector.
About 14% of office space in Beijing and 9% in Shanghai was vacant, according to data he cited at the time.
“Western investors must remember that Chinese consumers are not the next big hope,” he said.
1,000 times worse than Dubai
Chanos has consistently said China’s bust will be a thousand times worse than Dubai.
“It’s very hard to let air out of a property bubble without collateral damage,” he said.
Chanos also expressed concerns about the country’s banking sector.
The Chinese economy is adding $2 trillion of new debt every year, and half of that is problematic from day one, he said.
And since only 50% of the problematic debt is recoverable, about $500 billion, or 10% of gross domestic product, is bad debt, he said.
Last week, China’s sovereign-wealth fund bought about $31.5 million worth of stakes in the nation’s “Big Four” lenders — Agricultural Bank of China Ltd. HK:1288 -7.87% CN:601288 +0.38% , Bank of China Ltd. HK:3988 -4.74% CN:601988 +0.33% BACHY +1.53% , Industrial & Commercial Bank of China Ltd. HK:1398 -6.05% CN:601398 +0.48% IDCBF -2.83% , and China Construction Bank HK:939 -4.39% CN:601939 +0.22% CICHF 0.00% . See report on China’s purchase of banking shares.
The move is a likely indication of which banks the Chinese authorities are worried about, according to Chanos.
In his earlier presentation at Monday’s conference, he cautioned Western investors to remember that politics are a big part of business in China, and that in effect, banks are instruments of state policy.
He also reiterated the message that the house always wins when it comes to foreign investors and China. Remember how they treat Western investors, he said.
“History has not been on our side,” he said.
During the interview, he briefly revisited that particular theme. “Corruption is endemic there. Contracts are meaningless,” Chanos said.
Sue Chang is a MarketWatch reporter in San Francisco.