Jim Chanos made global waves in 2001 with “the market call of the decade, if not the past 50 years”, as Barron’s put it in 2002. He is widely deemed the first person to blow the whistle on Enron, first shorting the stock near its peak in late 2000.
In 1985, he founded his hedge fund Kynikos Associates (the name stems from the ancient Greek for ‘cynic’), which with $6bn under management is the biggest investment group specialising in short selling, notes Switzerland’s Finanz und Wirtschaft. For the past two years, he has been warning that China’s credit and housing bubble will end in a hard landing.
China’s basic problem is that the economy is far too reliant on fixed investment, Chanos tells Finanz und Wirtschaft – much more so than Japan in the late 1980s. Now that the government is slowing the building boom, what can fill the gap in GDP? Exports certainly can’t.
And make no mistake, the bubble is bursting. Chanos says he ignores official figures – anyone who believes in precise official data is making a fool of himself, he reckons – and keeps a close eye on transactions in the private sector. The property sector has cooled rapidly and the prices of cement and steel have also tanked.
This is especially awkward because China’s banking sector “is built on quicksand”. Bad loans reached 40% of the total during two previous credit crises – 1999 and 2004/2005. Weakened banks still don’t have enough capital and now a new wave of dud loans is on the way. “China’s banks should send Greece a monthly thank-you card,” he says.
Once the markets begin to look seriously at China, they’re not going to like what they see. Everyone is hoping the property market can land softly and will have little impact on the rest of the economy. But that, says Chanos, was the prevailing sentiment in America in 2007 too.