“China is heading for a fall”, says Jim Chanos – and it “will take Asia and resource economies like Australia and Brazil with it”.
Chanos, the short seller who predicted the collapse of both Enron and the US housing market, believes the Chinese property boom is a bubble that will eventually burst. Speaking to CNBC, he says: “The property crash in China will be worse than it was in America or the UK.”
He notes that “real estate values compared to GDP are like Japan in 1989 or Ireland in 2007″, and that “construction accounts for 70% of Chinese GDP”. Debt is “spiralling upwards” and there is “$4 of credit for every dollar of GDP growth”.
Many investors seem unworried because they assume that “the Chinese government can do what it wants. This is a “misconception” – when the crash comes the government will not be able to stop it.
Chanos, the founder and president of Kynikos Associates hedge fund, first made the call to short China last year and admits that it is difficult “to get the timing exact… The catalysts are obvious afterwards but not so easy to spot at the time.” He first began shorting the US housing market in 2005 and notes that the “turning point” came when “the cranes stopped multiplying and construction slowed”.
So he is prepared to wait on China. In any case, “so far it has been a good trade. China might not have collapsed but equities were down 20% in 2010″.
Chanos, who has used satellite images from Google Earth to highlight Chinese “ghost cities”, has been criticised by some fund managers for never visiting China. But he thinks “being on the ground is overrated. In fact, people in China get bamboozled the other way. They see lots of activity and think things are booming… But if that isn’t economic activity, you’re going to have a problem, no matter how good it looks. People should spend more time studying the numbers.”