Jim Chanos' Bearish Bets On China

A friend sent me a recent NY Times article, the topic of which was short-selling hedge fund manager Jim Chanos' current focus on China.

It seems there is a clear difference of opinion building between some respected financial veterans.

Chanos suspects that the Chinese have been misrepresenting their economics statistics, among other things. He also, according to the NYT piece, believes that China will soon be stuck with warehouses full of goods they manufactured or assembled, but can't sell to the West, notably America.

One-time hedge fund manager Jim Rogers emphatically disagrees. Rogers became such a proponent of Asian growth that he moved his family to Singapore a few years ago. From this perspective, Rogers has criticized Chanos, derisively observing,

“I find it interesting that people who couldn’t spell China 10 years ago are now experts on China,” said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. “China is not in a bubble.”

We both inherently distrust Rogers' objectivity. Additionally, Rogers seems to believe that Chanos is bearish on China forever. But that's not what Chanos is actually saying.

Rather, according to the Times article, I've seen Rogers hold forth enthusiastically on commodities and Asia for the past few years in various interviews on CNBC. That may well be true in the long term.

But I believe Chanos is, instead, contending that there is a short term valuation disconnect in China. Speaking from personal experience watching equity market downdrafts for over twenty years, the sudden awareness of overvaluation brings about a quick, severe drop in values. But it doesn't necessarily derail long term growth prospects, nor reverse advantageous terms of economic competition.


It's a reasonable bet, though, that any Chinese economic slowdown and valuation collapse would have ripple effects on the US equity markets, if only as a sentiment reflecting more serious, sustained global economic weakness than had been hoped.

As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.



“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.” He is planning a speech later this month at the University of Oxford to drive home his point.

I asked the colleague who sent me the article what he thought, and he, as do I, leaned toward Chanos' view.