8/25/2015

MeetJimChanos:ThemanwhosaidChinaisinthemidstofanunsustainablecreditbubbleTheEconomicTimes

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MeetJimChanos:ThemanwhosaidChinaisinthemidstof
anunsustainablecreditbubble
PostaComment

ByNewYorkTimes|25Aug,2015,01.01PMIST

ByJoeNocera
Infall2009,JimChanosbegantoaskquestionsabouttheChineseeconomy.Whatsparked
hiscuriositywastherealizationthatcommodityproducershadbeenlargelyunaffectedby
thefinancialcrisisindeed,theyhadrecordedbigprofitsevenasothersectorsfound
themselvesreelingintheaftermathofthecrisis.
Whenhelookedintowhy,hediscoveredthatthecriticalfactorwasChina'svoracious
appetiteforcommodities:TheChinese,whohadlargelysidesteppedthefinancialcrisis
themselves,werebuying40percentofallcopperexports50percentoftheavailableiron
oreandeyepoppingquantitiesofjustabouteverythingelse.ThatinsightsoonledChanos
tomakeanaudaciouscall:Chinawasinthemidstofanunsustainablecreditbubble.
PerhapsyourememberJimChanos.ThefounderofKynikosAssociates,a$3billionhedge
fundthatspecializesinshortselling,Chanoswasthefirstpersontofigureout,some15
yearsago,thatEnronwasahouseofcards.

Whenhelookedintowhy,hediscoveredthatthecriticalfactor
wasChina'svoraciousappetiteforcommodities.

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HeshortedEnronstockmeaningthathewouldprofitifthestockfell,ratherthanroseandsharedhissuspicionswithothers,including
myfriendBethanyMcLean,whowroteastoryforFortunethatmarkedthebeginningoftheendforEnron.ThatcallnotonlymadeChanos
asmallfortuneitalsomadehimfamous.
ChanosandhiscrewatKynikosdon'tmakebig"macro"betsoneconomiestheirstyleismore"micro":lookingatthefundamentalsof
individualcompaniesorsectors.AndsoitwaswithChina."I'llneverforgetthedayin2009whenmyrealestateguywasgivingmea
presentationandhesaidthatChinahad5.6billionsquaremetersofrealestateunderdevelopment,halfresidentialandhalfcommercial,"
Chanostoldmetheotherday.
"Isaid,'Youmustmean5.6billionsquarefeet.'"
Themanrepliedthathehadn'tmisspokenitreallywas5.6billionsquaremeters,whichamountedtoover60billionsquarefeet.
ForChanos,thatiswhenthelightbulbwenton.ThefastgrowingChineseeconomywasbeingsustainednotjustbyitsexportprowess,
butbyapropertybubblepropelledbymountainsofdebt,andencouragedbythegovernmentaspartofaninfrastructurespendingstrategy
designedtokeeptheeconomyhumming.(AccordingtotheMcKinseyGlobalInstitute,China'sdebtloadtodayisanunfathomable$28
trillion.)
Chanossoonwentpublicwithhisthesis,givinginterviewstoCNBCandCharlieRose,andmakingaspeechatOxfordUniversity.Hetold
RosethatpropertyspeculationinChinawasrampant,andthatbecausesomuchoftheeconomydependedonconstructioninmost
casesbuildingpropertiesthathadnochanceofgeneratingenoughincometopaydownthedebtChinawason"thetreadmilltohell."
Healsopointedoutthatmuchoftheconstructionwasforhighendcondosthatcostmorethan$100,000,yettheaverageChinese
householdmadelessthan$10,000ayear.
Canyouguesshowthefinancialestablishment,convincedthattheChinesejuggernautwasunstoppable,reactedtoChanos'contrarian
thesis?Itscoffed.
"Ifinditinterestingthatpeoplewhocouldn'tspellChina10yearsagoarenowexpertsonChina,"thewellknowninvestorJimRogerstold
http://economictimes.indiatimes.com/news/international/business/meetjimchanosthemanwhosaidchinaisinthemidstofanunsustainablecreditbubble

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8/25/2015

MeetJimChanos:ThemanwhosaidChinaisinthemidstofanunsustainablecreditbubbleTheEconomicTimes

TheNewYorkTimes.Headded,"Chinaisnotinabubble."
TheconventionalviewwasthattheChineseeconomywouldcontinuetogrowatarapidpace,andthatChineseofficials,unencumbered
bythemessinessofdemocracy,couldmakequickadjustmentsiftheeconomystartedtoslip.
Chanoswasundeterred."Itremindedmeof1989,wheneverybodysaidthatweshouldemulatetheJapanesemodel,"hetoldme."They
usedtosay,'Theycangetstuffdoneandwecan't'"justasthesupposedexpertswerenowsayingaboutChina.
Asitturnsout,China'seconomybegantoslowrightaroundthetimeChanosfirstmadehiscall.Nomatter:MostChinaexpertsremained
bullish.Chanos,meanwhile,wasshortingthestocksofanumberofcompaniesthatdependedontheChinesemarket.Andhewas
regularlysendingoutemailswhenhecameuponarticlesthatseemedtoconfirmhisthesis:storiesaboutnewlyconstructedghostcities
andtroubledbanksanddebtladenstateownedenterprises.
OnMonday,withthemarketsinfreefall,itcertainlylookslikeChanoshasbeenvindicated.China'snottheonlyreasonthestockmarket
hasbeensovolatile,butit'sthemostimportantone.China'seconomyisfaltering,itsstockmarketiscollapsing,andthehamhanded
effortsbygovernmentofficialstopropupbothhavemainlyhadtheeffectofdisabusinganyonewhostillthinksthey're"omnipotentand
omniscient,"asChanosputit.ThislossofconfidenceinChinaanditsleadershasspookedstockmarketsaroundtheworld.
Themoraloftoday'sstoryisasimpleone.Listentotheskepticsandthecontrarians.Youdismissthematyourperil.
StayontopofbusinessnewswithTheEconomicTimesApp.DownloaditNow!

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