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Chanos: "China's Treadmill To Hell" Will Break This Year And The Bubble Will Pop, Kynikos Is Shorting Chinese Developers And Construction Suppliers

Tyler Durden's picture





 

In a Charlie Rose interview to air later, Jim Chanos repeats his warning about all hell breaking loose once the China bubble bursts and puts a timeline on the event - late 2010 or 2011. "Supply will equal demand at some point. It always does, and then there is this precarious tipping point when suddenly you can't sell a project and then it's just as if everyone from the port side of the cruise ship goes to the starboard side of the cruise ship all at once. You get a tipping point, you get this light-bulb moment - "I've got to get out while I can." And the buyers dry out. It's as old as market itself." Chanos also voices his opinion on the CNY, and ever the contrarian, he, just like Edwards and Zero Hedge, implies that the CNY is actually overvalued, contrary to what the NYT's paywall may want you to believe: "Chinese exports aren't the problem here. And what if it turns out that by having to nationalize lots and lots of real estate bad debts, the RNB is devalued." All spot on, however we disagree with Chanos' conclusion that this is something that nobody is expecting: note here and here.

Some other snippets about the interview from Bloomberg:

The world’s third-biggest economy may need to keep up the
pace of property investment because up to 60 percent of its
gross domestic product relies on construction, said Chanos. The
bubble may begin to “run its course” in late-2010 or 2011.

Chinese state and local governments are among the most
leveraged to property-related borrowings and the nation will
“ultimately” have to nationalize a lot of the bad loans that
will arise from the end of the bubble, Chanos said.

China’s foreign currency reserves will be “one asset”
that can be used to fund a cleanup of the banking system, he
said. The country has accumulated a record $2.4 trillion of
reserves, and $889 billion of U.S. government debt, partly a
consequence of its exchange-rate policy.

Chanos was one of the first investors to foresee the 2001
collapse of Houston-based energy company Enron Corp. The
investor said he is short-selling Chinese developers as well as
companies supplying building-related materials to the country,
without identifying any stocks.

We will provide the full Chanos-Rose interview in its entirety once it is available.

 

 


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Thu, 04/08/2010 - 16:48 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

Jimmy, loved your call on Enron but you're going to get your head handed to you on your short China call. Please start shorting Chinese solars...lol...will make my upside that much sweeter when parabolic moves set in!

Thu, 04/08/2010 - 17:28 | Link to Comment percolator
percolator's picture

Chanos is not shorting China across the board just the property sector.  So Leo, you're out of luck on your solars and god knows you could use some since they're significantly under-performing the broad indices.

Thu, 04/08/2010 - 17:48 | Link to Comment jswede
jswede's picture

Leo, you miss major details in just about every one of your posts/replies I've read.  Broad strokes, nevermind the details - you really fit the pension mgmt stereotype.

Thu, 04/08/2010 - 18:17 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

That's ok, I used the dip to purchase a lot more. I am confident that Chinese solars will outperform going forward.

Thu, 04/08/2010 - 18:34 | Link to Comment Deep
Deep's picture

I think leo is full of it. I have caught the guy in so many lies before. Where are you getting all this money to buy the dips? Before he said he traded for a living and when i asked the same question, he then said he consulted on the side. Agian i ask, where is all this money coming from to buy the dips?

I CALL BULLSHIT  

Fri, 04/09/2010 - 00:26 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

Deep, 

I work full time, and spend a couple of hours a night blogging. If you ever come to Montreal, I'll be happy to show you my monthly investment statments so you can verify that I'm not bullshitting you. In the meantime, buy Chinese solars and STFUP.

Thu, 04/08/2010 - 20:56 | Link to Comment troy64
troy64's picture

Leo,

 

You really need to evaluate your thinking process  Truly...

China is a fucking humang...bubble and its about to explode. Greece fagots are about to get their cocks stuffed in their mouths and it will be even beyond FED's ability to 'outspend' the problems that are about to come to head, globally...THE ENTIRE FUCKING WORLD IS BROKE, WHILE THEY TRY TO VONVINCE US THA ALL IS GOOD VIA MANAGED 40 DOW UP POINTS ON DAILY BASES!

So I am not sure that your solar stuff is going to do so well when the margin calls come to fruition and all hedgies are tripping over each other to deleverage.

bonds and cash are the salvation for the rest of the year! Not even gold will protect you.

Fri, 04/09/2010 - 02:53 | Link to Comment Ramming the Rec...
Ramming the Recession's picture

Well, I rarely like to speak, but... I must admit: it is really annoying - all that negatvie fingering and speaking to Leo Kolivakis. He has his view, anyone is free to argue. But 'argue' implies arguments. Not pure emotions without anything else.

P.S. hope this call to be rightly heard

Thu, 04/08/2010 - 17:37 | Link to Comment omi
omi's picture

There is no reason to short Chinese solars. This is a growth industry that is now getting closer to being cost-effective without subsidies.

Thu, 04/08/2010 - 23:28 | Link to Comment Double down
Double down's picture

Leo come on, just a little tiring

Thu, 04/08/2010 - 16:35 | Link to Comment Dark Helmet
Dark Helmet's picture

I agree that China is in a bubble, but remember:

"The market's ability to ignore reality and go higher in a bubble is greater than your ability to short it."

China's bubble will go longer than a year. It's going to last several years, go higher than anyone expects, and make a much louder "pop" when it bursts.

I thought the housing bubble was due to pop in 2005... so that's a good example. It went crazier than I ever would have imagined.

Thu, 04/08/2010 - 16:54 | Link to Comment fuggetaboutit
fuggetaboutit's picture

Um every homebuilding stock made its high in 2005 and then dropped about 80% over the next 3 years to their lows

The banking sector ran another 15% from 2005 to its peak, then collapsed 85% to its low

It cost $1 to get  pound of copper out of the ground and production is growing at least 4% a year and there is plenty of copper out there (just today freeport magically stumbles upon a new find in chile) 

For 20 years copper oscillated around the marginal cost of production, $.50 to $1.50 to $.50 to $1.50 you get the point

Then came US housing bubble, then came chinese stimulus stockpiling then came chinese property bubble and with that copper sits at $4 and (ofcourse) inventories are highest since 2004 because anyone in the business of pulling copper out of the ground is selling it to whatever dope they can find that wants to pay them 3x to 4x their production cost

Where you think it is 3 years from now? $4 per pound, a price for which there is no economic justification, or back to marginal cost?

Thu, 04/08/2010 - 19:37 | Link to Comment -1Delta
-1Delta's picture

F**** copper. F**** China.... I am so tired of waiting for this short!

Thu, 04/08/2010 - 17:41 | Link to Comment WilliamShatner
WilliamShatner's picture

The market can stay irrational longer than you can stay solvent.

Thu, 04/08/2010 - 18:00 | Link to Comment fuggetaboutit
fuggetaboutit's picture

yes, the market can also collapse faster than you can react

we can throw all the useless quotes around we want (dont bet against the us consumer, there is my personal favorite)

is there a glaring and obvious imbalance? yes

is there an asset that has graviatated meaningfully away from cost? yes

are people inventing assinine reasons for the price of the asset? yes

the sum total of those answers tells us the next move of magnitude for said asset is down, not up and while I have never met the man, I am fairly sure that is what mr chanos is communicating.

it is absolutely amazing to me that the arguments made in defense of china and commodities right now are literally identical to the defenses offered for technology stocks in 1999 and 2000. not like the arguments are kind of close, they are IDENTICAL

 

 

Thu, 04/08/2010 - 19:40 | Link to Comment -1Delta
-1Delta's picture

+1 tho timing is the issue - euphoria over China.... so lame

Fri, 04/09/2010 - 00:46 | Link to Comment dark pools of soros
dark pools of soros's picture

once there is just one world currency, they can devalue it forever..and forever..

Thu, 04/08/2010 - 16:38 | Link to Comment omi
omi's picture

It seems like a worthwhile trade, he may be early 1/2 year to a year.

Purely on semantics: Supply never equals demand, what we can observe repeatedly is that supply creates new demand.

Thu, 04/08/2010 - 16:45 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

More like he may be early by a couple of decades.

Thu, 04/08/2010 - 22:22 | Link to Comment aus_punter
aus_punter's picture

Leo, you are clearly bullish on China and have strong opinions on it. Can you explain why the Chinese stock market is lower than it was last year.  Either the stock market is not a forward indicator or it is and the party is over.  What do u think ?

Thu, 04/08/2010 - 16:46 | Link to Comment solgundy
solgundy's picture

Chanos needs a perp walk

Thu, 04/08/2010 - 19:17 | Link to Comment gringo28
gringo28's picture

yup. as soon as i see ANY manager out there spilling the bean on the alleged "secret" home run trade, watch out. i think some of these guys are the real tipping point: they ain't got any real trades left to justify the fees. who in their right mind really thinks they can short a coordinated central banking system? i would also point out that Chanos has now effectively narrowed his stance substantially. previous comments centered on the global supply chain benefitting from China, now it's "just" housing and housing related? please.

 

you can't think of commodities in nominal prices because the principal trade is a declining USD & Euro.

Thu, 04/08/2010 - 16:48 | Link to Comment buzzsaw99
buzzsaw99's picture

whatevah

Thu, 04/08/2010 - 16:55 | Link to Comment BorisTheBlade
BorisTheBlade's picture

Jim even being right in principle can be wrong on timing.

And what if it turns out that by having to nationalize lots and lots of real estate bad debts, the RNB is devalued.

That is a good point ... but it assumes they will nationalize those debts. Other than that, are there the reasons why the RMB is 'overvalued'?

Thu, 04/08/2010 - 17:15 | Link to Comment RagnarDanneskjold
RagnarDanneskjold's picture

Right now China is a bit of a one-way valve. It's easy to get money in, not so easy to get it out. External and internal demand for RMB is satisfied more than internal demand for foreign currency.

They grow money supply at 25% a year and are still a mainly cash society. When the debts die in the U.S., the money dies with it. In China, when the debt dies, the money survives.

Everyone thinks selling Treasuries is bad for USD, but what happens if China is selling Treasuries for a bad reason, maybe because citizens demand dollars. In that case, will they operate like a gold standard and soak up excess RMB and have deflation? Or will they devalue and let the RMB weaken versus the dollar? 

Also, aside from the most recent appreciation, RMB has actually devalued or held steady since 1980, with the huge devaluation of 1994 that dropped it to the 8 to 1 exchange rate.

Fri, 04/09/2010 - 02:15 | Link to Comment lewy14
lewy14's picture

Thanks - I'd intuited something like this; Chinese debt just doesn't feel as "brittle" and destructive as the Western variety... the cash factor may be why I got this feeling.

Thu, 04/08/2010 - 16:52 | Link to Comment ZackAttack
ZackAttack's picture

Biggest bubble I can find in the history of the world, 60x top to bottom.

 

Means nothing as far as timing a trade, though. Mississippi Company was around for 70+ years in various guises.

Thu, 04/08/2010 - 17:49 | Link to Comment tmosley
tmosley's picture

That is called industrialization, and industrialism is not a bubble.  You will find similar growth profiles for England, the US, France, and numerous other "developed" countries as they went from feudalism to capitalism. 

Thu, 04/08/2010 - 21:28 | Link to Comment Kayman
Kayman's picture

Go to China. Look outside the veneer. Chanos is right. And it won't be 10 years. Their entire growth model was built on other countries ideas, patents and innovation.

Making cheap, inferior crap for Chinese Wall-mart is not the basis for future growth.

And their worst mistake of all- is copying the same fatal Monetary Policy of Greenspan and Greenspan, Jr.

Kayman

p.s. Leo- if your Chinese solars are of the same quality control as Chinese christmas tree lights, be sure to be selling while you are promoting Chinese solars to others.

Thu, 04/08/2010 - 16:58 | Link to Comment 10044
10044's picture

A greek shorting china! Lol

Thu, 04/08/2010 - 17:08 | Link to Comment Booky28
Booky28's picture

Would shorting copper be a good play here?

Thu, 04/08/2010 - 19:42 | Link to Comment -1Delta
-1Delta's picture

Timing...

Thu, 04/08/2010 - 21:57 | Link to Comment Edna R. Rider
Edna R. Rider's picture

A lot smarter money managers than I am believe that going long China = going long commodities and vice versa.  One of my closest pals is both Chinese and formerly ran one of the largest commodities desks on the planet.  If you think the China economy will slow significantly (I have no view on this) then you can either short China or short commodities (it is doubling down to short both IMO).  I am inclined to short commodities although the main hazard is Bernanke's dollar devaluation.  But I think china = commodities.

Fri, 04/09/2010 - 06:20 | Link to Comment -1Delta
-1Delta's picture

well ya according to the headlines.... think of it like oil tankers returning from contango storage... ah demand = storage, not = use

 

she will crumble- commodities is the high beta short

Thu, 04/08/2010 - 18:22 | Link to Comment Sudden Debt
Sudden Debt's picture

BURN CHINA BURN!!  NOTHING SMELLS BETTER THEN A SMOKED PEKING DUCK IN THE MORNING! BOJAAH!!

Fri, 04/09/2010 - 11:34 | Link to Comment Missing_Link
Missing_Link's picture

lolwut?

Take a chill pill, princess.  None of us hate China 'round here.

Thu, 04/08/2010 - 18:25 | Link to Comment carbonmutant
carbonmutant's picture

And the BDI keeps falling...

Thu, 04/08/2010 - 19:44 | Link to Comment chindit13
chindit13's picture

Yes, all the shipping indices look bad, but the ever-resourceful Middle Kingomites are capitalizing on this by turning unused 20' shipping containers into low cost housing in the once-and-forever boom towns like Shenzen.  Instead of holing up with 50 of their workmates on the 5th floor of a company-supplied, one bathroom walkup, migrants can now rent a refurbished container for 2000 yuan per year (about $300).  And if some crane operator mistakes their home for a shipment of t-shirts on the way to America, they arrive in their new land literally with all the comforts of home.  What better way to illegally immigrate?

Thu, 04/08/2010 - 22:39 | Link to Comment MaxPower
MaxPower's picture

Interesting remark about the shipping containers. I just left Singapore (I'm sure you've seen the fleet of empty ships just offshore there), and am now in Malaysia. I'd love to pick up some of those empty, unused containers and turn them into an eco-resort in Samoa, or an assisted-living / hospice center...

Completely off-topic, I know, but the topic was so boring: "china's going to blow, china's not going to blow"

 

(sigh)

Fri, 04/09/2010 - 01:05 | Link to Comment chindit13
chindit13's picture

I believe the largest collection of empty shipping containers in the world is in Los Angeles.  That's the result of having a massive trade deficit...stuff comes in, nothing goes out.

Fri, 04/09/2010 - 02:03 | Link to Comment MaxPower
MaxPower's picture

I've read a report or two regarding the port of L.A. Why these things aren't being re-purposed on a large scale is beyond me; but then, most things these days are beyond my limited comprehension...

Thu, 04/08/2010 - 19:47 | Link to Comment JW n FL
JW n FL's picture

China has already segmented the Local from the Federal default...

 

The fact that China is now importing more for consuption than it exports...

 

China is a cyclical economy or the markets are cyclical just the same... absorbtion by grass roots in country users has played out.

 

The government backstop protection of growing energy within thier own borders will be a safe place, like anywhere else going forward.

 

Thu, 04/08/2010 - 20:00 | Link to Comment ozziindaus
ozziindaus's picture

Shorting China would mean shorting a hell of a lot of US based companies. Just like the banks, the US government will not allow them to fail. 

RE in China may be seen as a hedge on inflation if and when the Chinese decide to float the Yuan. If that is the case, the Chinese RE market may be the barometer for which path the market will drive the RMB. 

Thu, 04/08/2010 - 22:26 | Link to Comment ED
ED's picture

The Yuan to go up, go down. It'll probably do both, especially, as Chanos says, general expection (taken for granted) it will appreciate. It's all a matter of time.

http://www.bloomberg.com/apps/news?pid=20601089&sid=a6Yhr6TQ2X40

 

 

Thu, 04/08/2010 - 22:41 | Link to Comment FreddyInBangkok
FreddyInBangkok's picture

my knowledge of solars goes no further than this so I won't comment but Leo maybe this piece on shorting solars by Hampton will be worth the read.

http://brontecapital.blogspot.com/

Thu, 04/08/2010 - 23:41 | Link to Comment stoverny
stoverny's picture

From Mish's blog, "e-mail from a Chinese citizen on China's Real Estate Bubble"

"For Beijing and Shanghai, housing is much more expensive. In Shanghai for example, the price for decent area is around 30000-Yuan/sq-meter, i.e., around $440/sq-feet. And yes, they are only condos/apartments. Hence, a 1000sq feet apartment will cost around $440,000. Yet the average college graduate earns only $5500/year.

How can they afford it? Short answer is they cannot. For the few who managed to buy in recent years, they dipped into the life-time savings of their parents, or even grandparents."

http://globaleconomicanalysis.blogspot.com/2010/04/email-from-chinese-on...

Fri, 04/09/2010 - 00:37 | Link to Comment Gromit
Gromit's picture

Michael Pettis writes about Chinese banks nonperforming loans this week.

http://www.mpettis.com

His take is that Chinese nonperforming loans will be earned out by punishing savers and consumers - at just the time when they need to become a larger part of the Chinese econmy to rebalance (reduce) the Chinese trade surplus. 

Fri, 04/09/2010 - 02:47 | Link to Comment Quantum Nucleonics
Quantum Nucleonics's picture

Chinese real estate is a bubble.  Look no further than who is buying... a manufacturer of diodes in Hong Kong started buying real estate, saying it wants to "diversify".  The suckers are buying now.  It's just a matter of time till the music stops, though these things can go on for longer than many think.  It won't stop till the credit gets removed, and the Chinese government run banks have every incentive to keep things inflated.

Fri, 04/09/2010 - 05:40 | Link to Comment verum quod lies
verum quod lies's picture

It reflect badly on my lazy nature, but I think I'll just restate fuggetaboutit's list:

"is there a glaring and obvious imbalance? yes

is there an asset that has graviatated meaningfully away from cost? yes

are people inventing assinine reasons for the price of the asset? yes

the sum total of those answers tells us the next move of magnitude for said asset is down, not up and while I have never met the man, I am fairly sure that is what mr chanos is communicating.

it is absolutely amazing to me that the arguments made in defense of china and commodities right now are literally identical to the defenses offered for technology stocks in 1999 and 2000. not like the arguments are kind of close, they are IDENTICAL"

Anyway, I think that sums things up well. Also, I really like the power of Chanos' tagline's image: "China's treadmill to hell." O.K., he has had some time to come up with that one, but it sure presents an appripro picture of the situation.

 

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