Fund manager Jim Chanos has been pretty vocal about the risks in China from its economy to its debt levels to its real estate market. He goes on to say that real growth in China now may be zero and he equates the implied debt levels to that of burdened European nations.
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If you invest in companies with high exposure to China, this might matter. If you invest in key ETFs like iShares FTSE/Xinhua China 25 Index (NYSE: FXI), SPDR S&P China (NYSE: GXC), and Guggenheim China Real Estate (NYSE: TAO) or if you prefer closed-end funds like The China Fund, Inc. (NYSE: CHN) or Templeton Dragon Fund Inc. (NYSE: TDF) then this really matters. Keep in mind that Jim Chanos has been bearish on China for some time. The problem is that with things slowing elsewhere the issues at hand could be coming to a real head. These funds and ETFs are generally down about 25% from year highs and most are closer to their lows of the last year.
Chanos recently spoke to Carol Massar on Bloomberg TV in this video.
On the debt issue… “The Chinese government’s balance sheet directly does not have a lot of debt. The state-owned enterprises of the local governments and all the other ancillary borrowing vehicles have lots of debt and its growing at a very fast rate. The assumption is that the state stands behind all this debt. We see that the debt in China, implicitly backed by the Chinese government, probably has gone from about 100% of GDP to about 200% of GDP recently. Those are numbers that are staggering. Those are European kind of numbers if not worse.”
The property bubble… “I think that will be the surprise going into this year, and into 2012 – that it is not so strong. The property market is hitting the wall right now and things are decelerating. The CEO of Komatsu said last week that he is having trouble getting paid for his excavator sales in China. Developers are being squeezed. They’re turning to the black market for lending, this shadow banking system that is growing by leaps and bounds like everything in China.
“Regulators over there are really trying to get their hands around the problem. In the meantime, local governments have every incentive to just keep the game going. So they will continue with these projects, continuing to borrow as the central government tries to rein it in.”
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What Chanos is shorting… “We are short Chinese banks, the property developers, commodity companies that sell into China, anything related to property there is still a short.” Oddly enough, Melco Crown Entertainment Ltd. (NASDAQ: MPEL) might be an indirect winner as Chanos is long the Macau casinos which are growing at a faster rate even than the property developers.
Chanos also outlined an IMF downgrade to China’s growth he outlined tha the write-offs make China’s 9% growth really about zero.
JON C. OGG