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?


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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BigJim's picture

...virtually none of that was ever intended to make profit.  it's a job sink during a rough economy that provides great benefit for decades later... and thus pays for itself over time.

To elaborate on Dr Acula's point above, infrastructure is a cost. It may or may not enable greater productivity, but building it for its own sake is a waste of resources.

Central planners are notoriously poor at guessing what investments will (or will not) provide future economic benefit.

Stax Edwards's picture

Blinded by the light, revved up like a duece....

chump666's picture

China is a fraud cap x million, that and a communist government running the show.  You about to get a wake up call from hell...

That's capitalism for you, take the pain.

HK learnt that in the 90's, now it's your turn.

chindit13's picture

You are a very funny guy!  I love this line:

"over here, we don't fuck around that much with credit"

In 2010 Chinese banks loaned out the equivalent of 45% of GDP.  Chanos estimates (the first figures are Chinese Government numbers) they might match that over the next year.

SOMEBODY in China is "fucking" with credit.

Perhaps your experience is different that mine.  Chinese young people I know borrowed from parents or relatives for the down payment.  The parents or relatives borrowed against their company, from a major bank if the company is large enough, from the shadow banking system if not.

What is the theoretical value of all Chinese real estate assets?  Has China generated anywhere near that much real wealth ever?  Hardly.  The only explanation is that the asset values are being supported by debt.  I remember these exact same arguments re Japan in the late 1980's, that is, minimal debt involved in real estate purchases, and a government that had everything under control.  Bank lending as a percent of GDP did not even match what China has today.  RE in Japan has fallen anywhere from 80-95% since 1990.  It can happen.  The people in Japan who sounded exactly the way you sound now got hammered.  Of course, maybe this time is different, eh?


greenback8's picture

Chanos is a nothing but a phoney like Barton Biggs and Jim Rogers.

Ramboy's picture

Barton Biggs pees in urinals with his pants dropped to the floor.

Smiddywesson's picture

Rogers was actually singing the praises of China during the conflageration of 2008.  He is a tool.

Smiddywesson's picture

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. 

Repeat post for those who missed it.  Been drinking a bit, so please excuse the typos.

John Kennith Galbraith, in his book, The Great Crash of 1929, wrote that "incantations" characterized the atmosphere after the top, when markets oscillated near the edge of the cliff.  The most common of these was that "great men" would join forces to suport the market in a showing of "Organized Support."  Organized support was on the lips of every Wall Street talking head, until the market swept the chattering magpies away, and stole their nest eggs.  

I have heard the China incantation for four years, and called it what it was, a bunch of bullshit, while gamblers rode their motorcycles and gave interviews about how China was going to pull their customers out of bankruptcy.  Do you know what I learned my fellow ZH readers?  Humility.  The gamblers knew that Wall Street works on bullshit.  They made money on Sinoforest and other frauds, while the people who were right refused to succumb to the illusion.   On March 9, 2009, the gamblers strode forth on the biggest bullshit injection in the history of the world, ramping the markets like no other time in history on taxpayer money.  Did you gain from this or did you sit on the sidelines because you knew you were right?  Today's incantation is that Uncle Ben and company will come to the rescue.  Well, I guess we will find out tomorrow.  

Good luck all.  The lesson I have learned is that you have to be a bit of a momo chasing gambler, and an informed contrarian.  My money is on the gamblers for tomorrow, but it's all good.

fdisk's picture

F* China counterfeiting everything.. I mean look, their GDP growth is near or over 9%?

Alright, check f* FXI Chinese etf.. ANYBODY, please explain to me, how with 9% GDP growth

Chinese stock market constantly going down??? How that's f* possible? FRAUD everywhere..

These guys counterfeiting GDP numbers, APPLE product, Versace, Gucci, Prada, cars, software,

everything.. Otherwise how the f*ck it's possible? Shanghai stock market trading like a pink sheet

stock which is about to collapse.. Symbol (FXI) 9% growth my A$$...

Smiddywesson's picture

Read Bad Samaritans.  It concerns the South Korean's view of how the emerging markets are treated by the developed nations.  It is also a real eye opener to have our own history about what we did when we were a developing nation thrown in our face.  It's a very balanced discussion and well worth your time.

laomei's picture

you really don't "get" china at all or have any damned clue how shit works here

fdisk's picture

Alright, can you explain why many Chinese companies listed on US exchanges are fraud and why Chinese stock market are constantly going down while Chinese economy growing at rates 8%+? Any particular reason? Looks like it's lost decade in China as well at least in terms of Stock Market performance.. I'm guessing if Chinese Gov can execute few stock market fraudsters, things can get better and Chinese Companies could have higher than 2.0 P/E valuation on US stock exchanges..?

Kayman's picture

Anyone who understands fraud "gets" China.

Stax Edwards's picture

(Un)fortunately it really is kind of that simple.  China really thinks they can cheat their way to the top.  I remain steadfast in my position that China is in for a hard landing. 

Remain bullish on US equities regardless of what Bernankenstein says tomorrow.  BTFD.  Mispriced equities all over the place due to high correlations, etf's, algos, etc.  Stock picking paradise IMO, get you some...

Disclosure: Net long(er day by day)

chindit13's picture

China has an approximate GDP of $6 trillion and a population of about 1.35 billion.  Let's use that and determine a per capita GDP.

OH SHIT!  It's $4444.44  Better either grow or shrink really fast to get away from that deadly number!

Now you are "there" so perhaps you can explain.  There are some 60 million empty residences.  98% of the population earns 40,000 yuan or less, which is roughly $6300.  What is the average price of a residence in China?  After eating, riding to and from work, paying school charges and incidentals like medical care, not much can be left from that $6300 to save for a home, yet you claim few people "fuck" with credit.  So all these people rent?  If so, given that they cannot afford to pay too much rent, the ROI on RE has to be pretty dismal.  Playing it for capital gains, are they?  A greater fool?  Good luck with that.

A poster below noted official PBOC figures regarding bank reserves and the PBoC's balance sheet, which suggests twice or more debt to GDP.  Those are the official figures and do not include the shadow banking system, a good portion of which would not show up in those figures.  As I noted below, it seems SOMEBODY is messing with credit in China.

BigJim's picture

you really don't "get" china at all or have any damned clue how shit works here

I'm sure 'shit' works the same in China as it does everywhere else.

fajensen's picture

Lay off the meat-flavoured-cardboard sandwitches. It is making you cranky.

sdmjake's picture

It seems like the pundits don't realize but... China only cares about China. When they go into another country to get resource deals they don't care if you are a democracy or a dictator. They don't try to effect policy. They just say "what you giving me? Let's make a deal" China is all about China. They are not interested in being a white knight. Quit viewing it through the WesternCentric lens... China is for China and the rest of the world can suck it.

reader2010's picture

Fuck that. China aint all about China. It only cares about perpetuating the Chinese Communist Party's rape its people.

X.inf.capt's picture

.  to both

lotta that going around the world.

James T. Kirk's picture

Now matter how you slice it, a rose is still a rose, and fiat money in any culture is still based on nothing. We might have single-family forclosure problem, but the chinks are going to have a "ghost-city" forclosure problem. The West developed amnesia regarding the basic principles of free enterprise almost 100 years ago, when the Fed redefined capital as something you print out of thin air, instead of SAVE. However, true free enterprise is still in our collective genes. What we have fogotten, the Chinese have not even learned. All they know how to do is ape the corruption that the US currently practices.

Caviar Emptor's picture

The Apples-to-oranges thingy comes to mind when attempting to compare market and non-market economies. 

In 1971, China was an ailing communist economy on the brink of disaster emerging from the turmoil of the cultural revolution. In 1971, the US was an ailing capitalist economy on the brink of disaster from the inflationary spiral coming out of the combined Vietnam war and cold war (with associated political turmoil). The two countries survived by becoming mutually dependent. 

I've been saying a long time here that I think the only outcome possible is for gradual convergence of the two economic systems (US and China). They've both already come a long, long way to accomplishing this. It's the only way for each economy to remain afloat without a radical reset and rebuild that could span decades and risks major political side-effects. 


reader2010's picture

Fuck that. The intergration of two economies didn't start untill 1991. In retrospect, 1971 was more about a unified front against their common enemy Russia.

Caviar Emptor's picture

A superficial opinon. but glad you can see what I mean about convergence

reader2010's picture

But back in 1971, the trade was secondary to the unified front against Soviet Union. After the collapse of the USSR, the trade started to take the driver seat.

Any sensible man could see the convergence even well before Nixon's trip to China. 



“Marilyn Mao” by Philippe Halsman, which was photographed in 1952.




“Mao Monroe” by Dali, which was painted in 1967.




matrix2012's picture

Did you mean U.S.S.R ???:D

X.inf.capt's picture

i remember that matrix,

that was ugly for the russian people

coming to a u,s. corner near you!

sethstorm's picture

That's the very thing that is worse than unhelpful - but actually harmful to the US.  China's still a despotic nation - they only give freedom to the Party apparatus and businesses that locate in that country.  What would be more helpful is if the US severed its links with China.



Dr. Acula's picture

>China's still a despotic nation

>What would be more helpful is if the US severed its links with China.

What's despotic is threatening to shoot or cage Americans who continue doing business with China. Which is the only way available to "sever" the links with China.

But of course thinking 1 or 2 steps beyond your bullshit opinions would require rubbing a few brain cells together.

sethstorm's picture

Given the nations that China partners with, it would make sense to do that to those "fellow travellers".  By offering economic aid and comfort to the enemy, those people stand with China and the equally despotic partners of the Middle Kingdom - not the US/EU.  Even South America's nations have regretted their partnership, given how China's practices offend those nations.  If these people wish to do business with China, they must be willing to accept the consequences of being a partner with a known enemy.  Perhaps they should reconsider if the costs of being with such a country are really worth being pursued, shot, caged, and repatriated by the US and/or EU.

Another point to be made is that the debt purchases are not much more than a return favor for the Opium Wars.  Cutting them off might be painful initially, but it would help the US regain its footing - while giving China a chance to reconsider whether it wants such a despotic government. 


Just as a pre-emptive on China:

Offering the lie of "we're not here to conquer" to equally despotic nations only says that China is there to conquer. 

knukles's picture

Maybe if we all bought some more Chinese shit they'd have enough money to bail everybody out?

chump666's picture

Legend.  He must be hammering the ASX200 on a given day

chump666's picture

China is the PIIGS X1000

SparkySC's picture

China is looking out for one country. 





However they've done a great job of getting the World to 'flip' their economic switch seemingly within a few decades.


Don't fear, they'll pull the rug out in no time. Get ready world.



Dr. Acula's picture

>However they've done a great job of getting the World to 'flip' their economic switch

I'm not sure what you mean.

China has done USA a great favor by providing us with subsidized goods at low prices. This frees us up to use our labor and resources on other needs - e.g. infrastructure, technology, medicine, leisure, etc.

We should thank China. If it weren't for China's generous gifts, US would be in even worse shape caused by its own self-destructive tendencies. For example, I think our fiat currency would have collapsed by now without China's help.

Unfortunately, for China and its paupers, it was for naught. The US debt held by them will be hyperinflated away. Their malinvestments will soon be revealed: worthless US paper and aging factories that one can't afford to operate.

James T. Kirk's picture

Excellent post. They HAVE done us a favor, and the whole relationship will be shown to be a giant multi-decade international fiat ponzi scheme when it finally caves in on BOTH nations. They will be left with crap paper, with no genuine political/economic system to internally utilize their own production capacity. We, on the other hand, will be left with crap paper, and a fossilized productive infrastructure.

sethstorm's picture

The US(and elsewhere) would be far better off without China than it would be with China.  The only favor worth returning them is causing China to turn against its own despotic government and to turn against those outside China that assist China.

You incorrectly assume that freeing up that person doesn't just put them in a worse situation.  Given how things have gone since the 1970's, more people have fallen into the worse situations that happen when you partner up with countries like China.  You would rather write the people off that are in these worse situations and hide them under the rug - when they provide the nasty truth that you cannot explain away. 

Given how the Third World countries are, those aren't gifts from China.  If they were gifts, they would accompany an instant transition for all that are dislocated to that mythical "better thing".  Instead of that better thing you keep on talking about for all, we get more dislocation and more junk from the thugs in China.


Ramboy's picture

CHINA has a 5 year/20 year and 100 year plan and doesn't care about rest of world.  If rest of world gets in the way they will intervene some.  IN the end, they don't care about Europe or the US.  Other continents are just stores for them to buy their goods to do their thing.  They don't care about you.

billwilson's picture

NOTE: He also said Taxes have to go up, and anyone who thinks they don't have to is nuts. Great interview.


Another good one - simple explanations: http://youtu.be/htX2usfqMEs

malek's picture

Can we now also do this "total credit growth x%, half of that debt will go bad, recoveries are 50%" for the US in 2011 and previous years, please?

??'s picture

agree but you're early

comeback in 2020 when H2O will have long since replaced Au as the topic du jour

Left Right Wrong's picture

Big announcement tomorrow morning and I'm not talking FOMC

Jack Burton's picture

I admit to little knowledge as regards China, other than what one reads on economic blogs like ZH. What control the old communist party has msut have been totally corrupted by having it's hands in the private sector growth machine. I assume no busness can prosper in China without communist approval and this must mean kick backs and bribery on a massive scale. One assumes that deep problems underlie the great Chinese manufacturing miracle. But for now they look like they are destroying the competition in the developed world. So many western jobs have gone to China that Europe and the USA are in deep trouble trying to employee their people now that most manufacturing has left for China.

The Chinese housing bubble seems ripe to explode. Their growth is bumping up against a water resource problem and pollution and climate change problems of massive scope. The CHinese growth machine looks about to suffer a major bump in the road. When it hits and how deep it is is beyond my limited knowledge. But if it comes, it will be a world shaking event.


Hacksaw's picture

Some stuff on China, it's people don't park their money in the bank, it goes into real estate. Much of the real estate boom in China is due to people buying property as long term investments. They don't care if it stays empty long term, that's why the ghost towns don't seem to be a large drag on the economy. When the property bubble bursts in China, mom and pop investor are going to be out their life savings because they bought with cash. The banks there are dealing with a ton of bad loans, this has to stay under the radar because most of them are to local governments. All China has is slave labor and a trade surplus, someday the biscuit wheels will fall off their gravy train.

sethstorm's picture

Then the most logical thing to do to help them on their way would be to cut China off from the US and EU.  it wipes out the trade surplus, incentivises the slave labor to assert its freedom, and takes the wheels off their gravy train.


long-shorty's picture

Speak it, brother Chanos! CLF to 40 by January.