Jim Chanos Debunks The Myth Of China As The World's "White Knight"

Tyler Durden's picture

One of the recurring themes on Zero Hedge in the past several months has been the continued mockery of the seemingly global conventional idiocy that China can bail out the world, when it itself is on the verge of a huge credit bubble popping and requiring the rescue of China itself by the rest of the global pyramid scheme (which however will be far too busy monetizing its own debt by then). Why, we vividly recall this quote from July 4, "So let's get this straight: a country which has 10% of its GDP in the form of bad debt, is somehow expected to be credible enough to buy not only Greek debt, but the EURUSD each and every day? Mmmmk. In the meantime, Dagong downgrades the US to junk status in 5, 4, 3..." Well, Dagong did since downgrade the US (as did S&P), although not to junk just yet, and somehow the world still continues to labor under the illusion that China (whose shadow banking system we also covered most recently here), is somehow healthy because it is far better than Europe (and the US) in hiding the true severity of its problems. Naturally, as long as that persists, the global ponzi will always have the benefit of pulling out a "white knight" whenever needed, regardless of just how ludicrous such an presumption has become. Today, famous China bear Jim Chanos appeared on Bloomberg TV and recapped his thesis which summarizes the bulk of these points, further extrapolating based on the Andy Lees analysis posted yesterday which estimates what a true economic growth rate is when one factors for bad debt and loss severities. His conclusion: "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." And this stagnant, overlevered behemoth is somehow supposed to be... the world's white knight?

Highlights:

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."

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Careless Whisper's picture

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spiral_eyes's picture

China has a property bubble. 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

The United States destroyed its industrial productive capacity, has a zombified financial system (including a huge derivatives ponzi that is yet to come down), stagnating labour market, stagnating infrastructure, a moronic Keynesian academia and government, and its currency is about to lose global reserve currency status. I suppose one thing we could be bullish about with the US is that they have the highest declared global gold reserves of any sovereign (still, gold would have to be at $11,000 an ounce to back all the dollars they've printed) — but we all know there's something fishy (i.e. tungsteny) about that.

China has a cold. U.S. has congential haemerrhoids, restless legs syndrome, diabetes, and its child has autism.

When are you going to publish something more balanced on China, Tyler? 

eisley79's picture

TPTB in the US know exactly what is going on, and what they are doing.  They will keep playing the status quo game as long as they can, and once the music stops,  the will just change and do whatever they want next.

China will get obliterated far worse than the US as a government/military/financial hegemony.

The US people, and lots of US companies, like China, will get crushed.

 

But dont think for a second the US isnt fully aware of everything that is going on, and whats coming.  They can and will end all free trade, not pay debt, devalue the dollar, create a new dollar, put interest rates to the moon, WHATEVER suits their interests best to keep the financial hegemony going. 

They will squeeze every last drop from the current system first, and then change to anything they want.

spiral_eyes's picture

"They can and will end all free trade, not pay debt, devalue the dollar, create a new dollar, put interest rates to the moon, WHATEVER suits their interests best to keep the financial hegemony going."

No doubt, they can do all of that. That won't rebuild the American economy, though. It'll just alienate America from a world which America is increasingly dependent on. Every day, America becomes more dependent on foreign oil and resources. The argument I often hear is "yeah, but  America has nukes, we can order other countries to do things and they will do it". But ever since mutually-assured destruction that hasn't been true. America needs the global resource and trade infrastructure. That's why we're in Iraq, Afghanistan, Yemen, Pakistan. That's why there are hundreds of bases around the world and why America spends trillions policing the world. 

If you don't control your supply chains, you have a geostrategic problem, period. China grasped the importance of supply chains, and 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.

Stax Edwards's picture

China has put itself in the position that it cannot upset the apple cart as far as supply chain goes.  It is just that they think they can "cheat" on their balance sheet and never have to pay the piper.  I think they are wrong.  I am firmly in Chanos camp on this.

alex_g's picture

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

 

BS.  America imports less than half of our oil, and the %age of imported oil goes down every day.  Except for oil, we import almost no resources.  We may be fucked up in other ways, but we are resource rich, something China longs to be.

spiral_eyes's picture

From a highly prescient article in 2006 from the The Trumpet:

 

"Until the recent spike in oil prices, few realized the extent of America’s reliance on foreign oil. America is by far the world’s largest oil consumer, importing 63.5 percent of its daily oil needs. In 2004, America imported as much oil as Japan, Germany, China and India combined.


The world’s demand for oil and other resource commodities is rapidly increasing. China and India especially seem to be snatching up each new resource supply that enters the market. Oil, gold, silver, copper, zinc, nickel, and many other commodities, have all recently set multi-year or -decade price records—some, like oil, have set nominal all-time price records.

America is facing a massive problem—as a nation it relies on the kindness of foreigners to provide the things Americans need most. The sad reality is that America relies on foreign nations for everything from manufactured goods to energy, raw commodities and strategic minerals to providing money to finance its massive fiscal deficits.

Evidence is mounting that foreign nations are starting to take notice of America’s weakness."

I love America — it's consistently been the freest and most capitalistic nation in the world. Why can't it sort out its damn supply chains, manufacturing and resource infrastructure and quit this free lunch bullshit that Kissinger and Nixon introduced in the 70s? 

 

spiral_eyes's picture

Let's assume that this figure is less smudged than those produced by other .gov departments (CPI, anyone?) 

What would happen to the American economy if some black swan caused an oil shock that took 20% of that imported oil off the table?

America would face severe disruption.

Hence dependency.

Also:

http://205.254.135.24/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTTNTUS2&f=A 

Reagan cut imports at the start of his Presidency, but America never quite weaned itself off the habit, and bounced much higher later... There's not much to say that the dip from 2008 isn't just lower demand (with lower demand, the first cuts would obviously be to imports) as opposed to less dependency per se.

http://en.wikipedia.org/wiki/Energy_in_the_United_States#Oil_consumption 

alex_g's picture

Did you even bother to look at why the #'s have changed?  And they are correct.  We would be in better shape than China, India and Europe if 20% of imports came off the table, because we export more refined product than that 20% represents.  Look at the numbers...this has all happened w/o an energy policy.  NGL's and biofuels are over 3mm bpd, and growing.  Our energy sector is performing...hopefully we don't fuck that up.

alex_g's picture

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

 

BS.  America imports less than half of our oil, and the %age of imported oil goes down every day.  Except for oil, we import almost no resources.  We may be fucked up in other ways, but we are resource rich, something China longs to be.

Payable on Death's picture

a_g, you da man. I'll go you one more, peak oil advocates are idiots.

China is only to be feared for the consequences of its collapse. A centrally planned economy cannot prevail. But, P.O.D., there's a billion of 'em! Right, and we're losing money, but making it up on volume.

alex_g's picture

Peak oil advocates don't count subsitution or unconventional oil/NatGas and the NGL's that come with them, or energy efficiencies that come w/ advances in technology.  Or the worlds slowing population growth.  Oil over $100 a barrel equals behavior change, which solves the problem.  Shale oil is profitable at $40 a barrel, shale gas at $3-4 per MMbtu.  Less if it is liquids rich.

Payable on Death's picture

The threat to future oil supplies is that much is controlled by governments.

slewie the pi-rat's picture

china's just about as full 0'shit as we are...
FREE TIBET!!!

palmereldritch's picture

If by "white" you mean "red" and by "knight" you mean "pawn", then sure...a white knight it is...

Stuck on Zero's picture

Yeah.  But we have the most extravagant and expensive weapons in the world!

philipat's picture

Americans don't understand Asia and should stick to what they know best: destroying their own economy. Chanos is wrong about China and will lose money on the trade. Ackman is also wrong about the HGD and will lose money on that trade also.

 

Interestingly SSEX, a useful leading indicator, is holding major support at 2400 and appears ready to rally?

 

Sincere apologies for the multiple posts below, something went wrong with my connection to the net and Windows 7 went mad. I couldn't find a way to delete the duplicated posts. Sorry again.

philipat's picture

Americans don't understand Asia and should stick to what they know best: destroying their own economy. Chanos is wrong about China and will lose money on the trade. Ackman is also wrong about the HGD and will lose money on that trade also.

 

Interestingly SSEX, a useful leading indicator, is holding major support at 2400 and appears ready to rally?

philipat's picture

Americans don't understand Asia and should stick to what they know best: destroying their own economy. Chanos is wrong about China and will lose money on the trade. Ackman is also wrong about the HGD and will lose money on that trade also.

 

Interestingly SSEX, a useful leading indicator, is holding major support at 2400 and appears ready to rally?

chump666's picture

yeah well the Shanghai B (mostly equities owned by non Chinese - major players) has been selling since the start of 2011.

China is done.  That's it.  Black money, grey money, corruption and bubbles.  Full implosion due, like Chanos said... end 2011.

Check Copper

Kali's picture

Apparently, the philipat American doesn't understand how to post comments.

philipat's picture

Americans don't understand Asia and should stick to what they know best: destroying their own economy. Chanos is wrong about China and will lose money on the trade. Ackman is also wrong about the HGD and will lose money on that trade also.

 

Interestingly SSEX, a useful leading indicator, is holding major support at 2400 and appears ready to rally?

philipat's picture

Americans don't understand Asia and should stick to what they know best: destroying their own economy. Chanos is wrong about China and will lose money on the trade. Ackman is also wrong about the HGD and will lose money on that trade also.

 

Interestingly SSEX, a useful leading indicator, is holding major support at 2400 and appears ready to rally?

philipat's picture

Americans don't understand Asia and should stick to what they know best: destroying their own economy. Chanos is wrong about China and will lose money on the trade. Ackman is also wrong about the HGD and will lose money on that trade also.

 

Interestingly SSEX, a useful leading indicator, is holding major support at 2400 and appears ready to rally?

Fukushima Sam's picture

Ah yes, the "global ponzi" is "monetizing the debt".  21st century for "the Master is ass-raping your wife and there's nothing you can do about it."

Freddie's picture

Chanos knows his stuff but at the Clinton Global Initative with a semi ripped off EU logo?   Clinton is a global grifter who skims tens of millions off of all the BS he does. Bush was an idiot to give African tens of billions and he let Clinton run the aid program.  Poppy Bush and M Barker Bush loved the Clintons.  One world vermin.

Chanos should know better than to be associated with a slime ball like Clinton. 

TK7936's picture

Im a white Knight, not China.

theXman's picture

The "long corruption" move could backfire when revolution sweeps across the corrupt nation.

Absalon's picture

China is the problem, not the solution.

X.inf.capt's picture

china's bubble

they'll go to war long before that bursts

this situation sucks!

Stax Edwards's picture

Dis information captain...right?

Stax Edwards's picture

Your moniker I thought.  What does x.inf.capt mean?  Disinformation Captain?

X.inf.capt's picture

as in use to be a NG inf capt

go troll somewhere else...

X.inf.capt's picture

my guess, china establishing a trade route to europe through pakistan, plus trying to replace the oil they lost from the REBELION in libya. hope im wrong.

TruthInSunshine's picture

I worship no man, and all men are fallible, but I deeply respect Chanos for his consistency in making top notch long term calls.

I do think Chanos' thesis on China will ultimately prove Jim Rogers (who I really like, also) to be dramatically wrong on his 'China bull' case.

thefedisscam's picture

Chanos knows NOTHING at all about China! but just as many Westerners, he thought he knew a lot. What an irony! What a Tragedy! How Pathetic!

DaBernank's picture

This is not an endorsement of the US, this is merely explaining his thesis vis-a-vis China based on data about the bad debts in the system. Hard to see how this is pathetic unless you are "religiously" invested in the position of China being infallible.

Ahwooga's picture

Got any data or ideas any more specific than, " he thought he knew a lot," champ?

Ricky Bobby's picture

Yes economic laws don't apply to the PRC. It is different this time.

Stax Edwards's picture

Well put RB.  It is ALWAYS different this time.  Particularly in state run enterprises.

BigJim's picture

Yes, economic laws only apply to free-market capitalism. Clever central planners can make all consequences of mis-allocation of capital, credit bubbles, and corruption disappear by edict.

Double down's picture

This is the real bubble:

Chanos knows NOTHING at all about China! but just as many Westerners, he thought he knew a lot. What an irony! What a Tragedy! How Pathetic!

Double down's picture

This is the real bubble:

Chanos knows NOTHING at all about China! but just as many Westerners, he thought he knew a lot. What an irony! What a Tragedy! How Pathetic!

hambone's picture

Chanos doesnt get it - Keynesianism is a religion and all it takes is unlimited belief.  The Chinese reeeeaaaallllyyyy believe.

papaswamp's picture

Have to keep the masses busy...can't have them idol.