Chanos Delivers Blunt Reality Check on China
Jim Chanos is at it again. The billionaire short seller has often worried that China’s economic collapse is right around the corner. Last year’s stock market crash proved he may have a point, but how would we know when the economic collapse is here?
Chanos may have an answer.
He says China’s problems are eerily similar to what went wrong in the United States a few years ago: reckless banking activity helped create the conditions for a crash.
So, if the Chinese financial system looks like the U.S. system did between 2005 and 2007, then that would give us a sign that the Chinese economy may be on the brink of collapse. Unfortunately, that’s exactly what’s been happening—a series of stock market crashes, followed by currency devaluation, followed by…well, misery.
Chanos laid out this devastating argument while speaking with Business Insider’s Linette Lopez and Josh Barro. (Source: “This is what Jim Chanos says he’s telling his clients about China right now,” Business Insider, May 23, 2016.)
“If we learned anything…during our crisis, it was you shouldn’t finance hard-to-value long-term esoteric real estate-related derivatives or securities with overnight money, which is what a lot of the investment banks ended up doing by ’07/’08,” he said. “They couldn’t move a bunch of the gunk on their balance sheet and increasingly they were financing themselves in the repo market.” (Source: Ibid.)
Let me translate that into plain English: you can’t place risky bets on a credit card.
By their very nature, credit cards are short-term debt. You are supposed to pay them off quickly after using them and the same goes for banks. You’re not supposed to gamble with it because you could dig yourself a pretty big hole at the blackjack table.
That’s what American investment banks did in 2008 and it’s what Chinese banks are doing right now. The “overnight money” Chanos mentioned represents their credit card. Chanos claims Chinese banks are using it to prop up a massive housing bubble.
Banks propping up a housing bubble…that, too, sounds familiar.
Jim Chanos is calling China out. Just look at the facts, he says. Chinese banks are ringing in debt-to-capital numbers of 300%, meaning they have $300.00 of debt for every $1.00 of equity. They are primed for a crash.
There were some specific warnings signs that flashed red before the Great Recession, but we ignored them at our own peril. We let it happen.
Now those same alarm bells are going off in China but nobody is paying attention.
Everyone is content to sit back and pretend like excessive debt can’t possibly be a problem. Chanos is one of the few willing to speak out.