Jim Chanos: China’s bad debts dwarf Greece and Spain's

Time has often shown Jim Chanos' predictions to have been spot on. So investors should heed his latest warning on Chinese banks. James McKeigue reports.

Veteran US investor Jim Chanos has a pretty impressive record of spotting and profiting from investment disasters in the making.

He is widely credited as the first person to short Enron, the seemingly solid US energy conglomerate that blew up spectacularly in 2002. He was also one of the first to spot the US housing bubble, which he began shorting in 2005.

And with the economic news coming out of China steadily deteriorating, it seems Chanos may have got another huge call right.

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Chanos has been warning that the Chinese economy was due a crash for the last two years. At first, few people listened to him, especially when he admitted that he had never been to the country. But now, with even Chinese leaders admitting that growth will slow, Chanos's view has become a lot more popular.

In one particularly infamous quote, Chanos said China looked like "Dubai times 1,000 or worse," referring to the country's real estate boom. Now that his take on that sector seems to be coming good, he's delivered another pithy quote on the banking sector.

One of China's main problems is "bad credit and credit extension that makes Greece and Spain look like child's play", Chanos said in recent interview with Opaleque TV. Too much money has been lent for construction projects in particular that will never make big enough returns to repay the original debt.

Chanos isn't just negative about China's macro-economic prospects. He is even more scathing about its companies. "When you get to the micro of individual companies, they look even worse. The accounting is horrible, they all seem to have negative cash-flow, non-collectable receivables they all seem to not earn their cost of capital."

But while this may not be good for China, it throws up lots of good investment opportunities for him, he says. Kynikos Associates a hedge fund Chanos founded in 1985 has short positions on several China-related stocks, which means he will profit if their value falls.

After starting out shorting "property companies, developers, cement companies, steel companies, as well as the original iron ore minors in Australia and Brazil", he has added the Chinese banks too, because they are "the nexus for all of this credit-driven investment."

James McKeigue

James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the Forbes.com London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.