China's economy, debt and real estate market.
Chanos said that growth in China may be zero and that China has
"European kind of numbers" when it comes to debt.
"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."
Misleading Indicators
Please consider China Stocks Advance Most in Four Weeks as Leading
Indicator Shows Growth
China's stocks rose, sending the benchmark index to its biggest gain
in four weeks, after a gauge of economic indicators signaled growth is
withstanding Europe's debt crisis and faltering expansion in the U.S.
"Valuations have reached a bottom, leaving limited room for further
declines," said Mei Luwu, a fund manager at Lion Fund Management Co.,
which oversees more than $7.8 billion. "Volatility will rise in the
market as investors bet on the timing of a rebound."
The index "signals a continuation of economic expansion through the
end of this year," Jing Sima, the board's New York- based economist,
said in a statement. "The rate of economic growth will be slower in
2011 than last year."
The IMF estimates the Chinese economy will grow 9.5 percent this year,
down from a forecast of 9.6 percent in June, and 9 percent in 2012.
The fund lowered its estimate for world growth this year to 4 percent
from the previous 4.3 percent forecast.
Expect Huge China Slowdown
Developers not getting paid, coupled with excessive and unsustainable
credit growth, trumps alleged leading indicators.
For another view on the coming slowdown in China, please consider
Michael Pettis: Long-Term Outlook for China, Europe, and the World; 12
Global Predictions.
Pettis, unlike Chanos does not foresee a China "crash" but at a
minimum, those expecting huge growth certainly will not get it.
Here are 12 predictions by Pettis (Please see article for detailed
explanations regarding China).
To summarize, my predictions are:
BRICs and other developing countries have not decoupled in any
meaningful sense, and once the current liquidity-driven investment
boom subsides the developing world will be hit hard by the global
crisis.
Over the next two years Chinese household consumption will
continue declining as a share of GDP.
Chinese debt levels will continue to rise quickly over the
rest of this year and next.
Chinese growth will begin to slow sharply by 2013-14 and will
hit an average of 3% well before the end of the decade.
Any decline in GDP growth will disproportionately affect
investment and so the demand for non-food commodities.
If the PBoC resists interest rate cuts as inflation declines,
China may even begin slowing in 2012.
Much slower growth in China will not lead to social unrest if
China meaningfully rebalances.
Within three years Beijing will be seriously examining
large-scale privatization as part of its adjustment policy.
European politics will continue to deteriorate rapidly and the
major political parties will either become increasingly radicalized or
marginalized.
Spain and several countries, perhaps even Italy (but probably
not France) will be forced to leave the euro and restructure their
debt with significant debt forgiveness.
Germany will stubbornly (and foolishly) refuse to bear its
share of the burden of the European adjustment, and the subsequent
retaliation by the deficit countries will cause German growth to drop
to zero or negative for many years.
Trade protection sentiment in the US will rise inexorably and
unemployment stays high for a few more years.
Valuations Not at Bottom
In the face of coming writedowns, alleged "cheap" valuations will
likely get much cheaper.
As Minyanville's Peter Atwater is fond of saying "At the top of every
credit cycle, the Income Statement is the Past, the Balance Sheet is
the Future"
Atwater's statement applied to "financial institutions", but Ponzi
financing is everywhere you look in China and the ripple effect will
hit every company just as happened in the US credit bust (soon to be
resumed).
Income only counts if you get it. Developers not getting paid is a
huge warning sign.
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