jim chanos

by

Skyscraper Index Indicates Next Global Crash in 2013

Most of us are at least passingly familiar with the theory: the completion of a new tallest skyscraper presages a market crash. Over-exuberant construction reflects over-exuberant markets, and over-confidence often spills over as the hyper-bullish slowly (and then quickly) realise that the good times are over.

Here’s the story so far:

And here’s the next chapter — earmarked for completion in January 2013:

Where else but China? As if that country didn’t already have enough empty buildings, enough empty office space, enough empty homes, and enough grey uninspired architecture. And it’s not like Changsha — the relatively-sparsely populated city where the thing is to be built — is running out of countryside to expand into.

Sky City One is planned to be prefabricated and built onsite, to a timeframe of just ninety days (that will instil confidence that the building won’t spontaneously collapse, right?) and at a much lower cost than the current titleholder (which of course presaged the 2008 crash, and bankrupted its builders) the Burj Khalifa.

“A milestone of life-style transforming” sounds about right (they have enough money to build a 200 storey building, but not enough to pay for good English translation?). The world will be a very different place after the next crash.

Not so good news for property speculators who are sure to dump money into what will soon be little better than a tax liability. But good news for Jim Chanos, and every other investor determined to short everything Chinese.

by

China Hysteria

I’ve already gone over the problems with both the rabid Sinophile “China will bail out the world” view, and its rabid Sinophobe “hard landing will crush China” equivalent.

Both views are broadly wrong with a few small kernels of truth.

Here’s a reminder of the problem:

China does have a property bubble and a scary-sounding $1.6 trillion in local government debt. But $1.6 trillion of local government debt is still significantly less than China’s dollar and treasury hoard. The bottom line is if that China’s real estate market collapses, China can bail itself out with money it has saved from the prosperity years, not through new debt acquisition. This was the lesson of John Maynard Keynes — governments should save in the boom years, to spend in the bust years and even-out the business cycle — a lesson which seems lost on Western policy-makers, who seem to believe that you should borrow massive amounts every year.

So taking the absolute worst-case-scenario, China has plenty of leeway to bail itself out. Of course, this would mean China might decide to liquidate a significant amount of its treasury holdings — especially seeing as bonds are at all-time highs.

Could such a liquidation be the event that finally bursts the Treasury bubble, sending yields soaring and making it much more difficult for America to acquire new debt?

The “China as central-planning disaster” brigade got a leg-up today, with the announcement that China’s GDP had missed predictions of 9.3% growth, instead hitting 9.1%.

Representing the Sinophobe camp, Zero Hedge raised an interesting point:

Suddenly everyone is a China expert, yet doesn’t realize that 9.1% is effectively the equivalent of a 1.1% stall print in an economy where 8.0% growth is the minimum threshold for social order and stability

Now I’m not enough of a China-expert to pluck an arbitrary growth figure out of the air as a “minimum threshold for social order and stability”, but if we want to talk about “social order and stability”, perhaps we should look closer to home — at the #OccupyWallStreet protests that have spilled across America.

From Xinhua:

The distrust and resentment manifested by Occupy Wall Street protesters towards the U.S. financial system could bear precarious consequences on the future of the United States, experts have told Xinhua.

Although the protesters account for only a small percentage of the national population, their frustration with the current economy and some of the government’s policies are shared by many, they said, citing similar rallies in dozens of other U.S. cities as evidence.

“America is in the midst of a massive ideological debate about the future of the country — what its economy will look like, and the role of capitalism and big government in America,” Richard Wottrich, a senior managing director at the McLean Group, told Xinhua.

Though it is still too early to tell what would be the legacy of the protests, the ongoing social movement may prove influential in determining the future course of the country at this difficult hour in its history, Wottrich said.

Luigi Zingales, a professor of entrepreneurship and finance at the University of Chicago Booth School of Business, echoed that the protests are “an indication of all the underlying forces that lead to some form of popular revolt or popular dissatisfaction.”

To get the protestors off the street and quell the fury, Obama and corporate America need to create jobs. Here’s what is needed to get back to pre-Depression employment:

That’s 256,000 jobs a month. Now, I’m not foolish enough to pluck an arbitrary figure out of the air as a “minimum growth rate to maintain social order and stability”, but if I was I’d say 8% growth was a realistic figure.

Of course, this entire argument is blind to the fact that a little social disorder (creative destruction) might be a good thing, and a few riots and bankruptcies might well fire up the engines of creation on both sides of the pacific rim. Of course, this doesn’t change the fact that the means of production are squarely located on the Chinese side of the divide, and that China stands strongly to benefit from this whether or not the CIA can successfully stir up Arab-spring-style protests in Beijing, Shanghai and Guangzhou (probably not).

The likeliest outcome remains that China will have to bail out its real estate and local government securitisation messes; but at least the funds to do it are equity from its trade surpluses, and not new money printing. Of course, new money printing on the other side of the pacific will come as soon as China starts liquidating treasuries. After all — someone has got to keep demand for US Treasury paper artificially high to keep interest rates artificially low and keep America’s debt obligations affordable…

by

The Only Chinese Hard Landing Will Be On America’s Head

A lot has been made of the so-called Chinese property bubble. And after 2008, when America’s subprime bubble was the straw that broke the camel’s back, who can blame those who see China as low-hanging fruit? In the hedge fund world, both Hugh Hendry and  Jim Chanos (among others) are significantly outperforming the market by shorting Chinese companies.

But the naysayers will be proven sorely wrong.

There are many differences between the Chinese situation and the American one but there is one that outsizes all the others. Over-inflated American (and by-extension, Western) property was being used as a spring-board to fund consumption. Growing home equity allowed real-estate owners to remortgage, and use their surpluses to buy boats, cars and trips around the world; i.e., living beyond their productive means. Once the property bubble burst, not only were many home-owners left underwater, but all of that excessive consumption came to a halt, with a significant negative effect on GDP. China simply doesn’t have that problem. The Chinese nation and its government are not net-borrowers but net-savers.

In addition, there is no evidence that China has the same problem with widespread securitisation that America had in 2008. The subprime bubble created huge systemic risk in the financial sector by bundling up subprime debt in mortgage-backed securities and collateralised debt obligations, and spreading it around American and European balance sheets. This made the system very fragile — as a few defaults, could lead to a global cascade of margin calls and defaults.

In fact, Chinese leverage levels are dropping.

From RBS:

Chinese firms are generally in good financial conditions. The latest data suggests that Chinese companies actually have seen their leverage ratios decline in the past three years, on the back of strong profitability and retained earnings. Most sectors have seen a decline in leverage. Property development was the only main sector that shows the opposite trend of rising leverage but it accounts for only about 6% of total loans. In fact, the average leverage ratio of Chinese companies is one of the lowest among key economies and emerging markets. At the same time, they have maintained one of the strongest profitability.

Chinese GDP (and profitability) is ballooning (and will continue to do so) because of global demand, even on the back of the recessions in Europe and America. That’s because China does everything much more cheaply, and so now controls crucial supply chains in components and products. Now that the world is flat, manufacturing such components in other places is not economically viable, so the supply chains no longer exist, and manufacturing-oriented labour markets are stagnating.

China’s good fortune is its high population levels and high population density.

From Noahpinion:

It is expensive to move products around. This means that if you have a factory, you want to locate it close to where your customers are, to avoid paying a bunch of shipping costs. Now consider two factories. The workers in the first factory will be the consumers for the second factory, and vice versa. So the two factories want to locate near each other (“agglomeration”). As for the workers/consumers, they want to go where the jobs are, so they move near the factories. Result: a city. The world becomes divided into an industrial “Core” and a much poorer agricultural “Periphery” that produces food, energy, and minerals for the Core.

Now when you have different countries, the situation gets more interesting. Capital can flow relatively easily across borders (i.e. you can put your factory anywhere you like), but labor cannot. If you start with a world where everyone’s a farmer, agglomeration starts in one country, but that country gets maxed out when the costs of density (high land prices) start to cancel out the effect of agglomeration. As transport costs fall and the economy grows, the industrial Core spreads from country to country. Often this spread is quite abrupt, resulting in successive “growth miracles” that get faster and faster (as each new industrial region starts out with a bigger global customer base). The evidence strongly indicates that agglomeration is the driver behind developing-world growth.

Looking at global population density — with American taxpayers subsidising the cost of a flat global marketplace — where can we expect productivity to agglomerate?


Of course, China does have a property bubble and a scary-sounding $1.6 trillion in local government debt. But $1.6 trillion of local government debt is still significantly less than China’s dollar and treasury hoard. The bottom line is if that China’s real estate market collapses, China can bail itself out with money it has saved from the prosperity years, not through new debt acquisition. This was the lesson of John Maynard Keynes — governments should save in the boom years, to spend in the bust years and even-out the business cycle — a lesson which seems lost on Western policy-makers, who seem to believe that you should borrow massive amounts every year.

So taking the absolute worst-case-scenario, China has plenty of leeway to bail itself out. Of course, this would mean China might decide to liquidate a significant amount of its treasury holdings — especially seeing as bonds are at all-time highs.

Could such a liquidation be the event that finally bursts the Treasury bubble, sending yields soaring and making it much more difficult for America to acquire new debt?

With 10-year yields now well below 2%, that sure looks like a bubble to me.

by

Is China a Bubble?

Hedge fund manager Jim Chanos (among others, including Nouriel Roubini) says that China is a giant wreck due a hard landing.

From Zero Hedge:

On the Chinese government’s balance sheet:

“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.”

On how a Chinese property bubble will play out:

“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.”

Chanos on his long and short positions:

“We are short Chinese banks, the property developers, commodity companies that sell into China, anything related to property there is still a short.”

“We are long the Macau casinos. It’s our long corruption, short property play. We feel that there’s American management and American accounting. They are growing at a faster rate even than the property developers.”

On the IMF lowering growth estimates for China:

“A lot of people are assuming that half of all new loans in China are going to go bad. In fact, the Chinese government even said that last year relating to the local governments. If we assume that China will grow total credit this year between 30% to 40% of GDP, and half of that debt will go bad, that is 15% to 20%. Say the recoveries on that are 50%. That means that China, on an after write off basis, may not be growing at all. It may be having to simply write off some of this stuff in the future so its 9% growth may be zero.”


Is he right?

Absolutely not.

China has a property bubble, resulting from excess supply. It is also the world’s greatest industrial behemoth, controlling the world’s supply chains in many key components, and is becoming an increasingly powerful player in energy markets thanks to its buy-out of Venezuela and its close ties to authoritarian Eurasian energy powers like Russia, Iran and Pakistan. This means that it’s probably not the best place for Westerners to park capital in the short term. But it has no bearing on China’s strategic standing in the medium to long term.

A comparison with America is inevitable. The United States destroyed its industrial productive capacity, has a zombified financial system , a stagnating labour market, stagnating infrastructure, a clueless establishment, and its currency is about to lose global reserve currency status.

Every day, America becomes more dependent on foreign oil and resources.

America needs the global resource and trade infrastructure. That’s why America is in Iraq, Afghanistan, Yemen, Pakistan. That’s why there are hundreds of bases around the world and why America spends trillions policing the world.

The counter-argument I often hear is “but America has nukes, America can order other countries to do things and they will do it”. But ever since mutually-assured destruction that hasn’t been true.

If you don’t control your supply chains, you have a geostrategic problem. China grasped the importance of supply chains, and through cunning use of long-term planning has made itself the spider at the centre of the web of global trade. America grasped they could get a free lunch with US treasuries and that free lunch destroyed their productive capacity.

China has a cold. America has congential haemerrhoids, restless legs syndrome, diabetes, and autism.