Apocalypse 2010: Signs of the end in Current Events: China's Credit Situation Is Worse Than Greece And Spain

Wednesday, July 11, 2012

China's Credit Situation Is Worse Than Greece And Spain

CHANOS: China's Credit Situation Is Worse Than Greece And Spain - Business Insider

In an interview with Opalesque TV, Jim Chanos gave his thoughts on short selling and also added his outlook on the China macro and micro situation.

Chanos sees many short opportunities in Chinese companies for a number of reasons, including a terrible credit situation. Below are some of the transcribed quotes from his interview, with the video embedded at the bottom of the page.

On China:

"A lot of people get the wrong impression, we are not macro people and I've stressed that we are stock people. But we came at China for exactly that reason. In the summer of 2009 we were looking at mining stocks, and we were trying to figure out why it was that in the teeth of a global recession, in mid-'09, that mining companies were reporting pretty close to record profits."
"When we put our research team to work on it, by late summer and early fall, it was due to this massive property and infrastructure build up." China had 60 billion square feet in high rise construction going on, 30 billion of which was being used for for office and mixed use.
"So China to us started in an examination of the global iron ore companies and has morphed into a reasonably diversified portfolio of property companies, developers, cement companies, steel companies, as well as the original iron ore minors in Australia and Brazil. And now the Chinese banks too, because as we did more and more work we discovered that the Chinese banks are the nexus for what all of this credit driven investment is flowing."

"The interesting thing about the China story, getting back to the macro and micro, and as dire as I think the macro story is -- due to bad credit and credit extension that makes Greece and Spain and the us look like child's play -- 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, noncollectable receivables, they all seem to not earn their cost of capital . So as you dive deeper and deeper into the individual ideas, they appear to be even better and better (for short selling)."

Chanos also commented on the political mistakes Europe has made in banning short selling.

"One of the new risks we have had to contend with is the short selling bans."
"We said (to Europe), you are going to make financing markets more difficult the minute you put the ban on, and sure enough that's what happened. The largest institutions that short the shares of banks and financial companies and purchase cds contracts are other banks and financial companies because of the interrelated nature of their credit risk. And when you go into that market and try to say we are going to stop the short selling because they think it's going to help pricing, the opposite happens. That's exactly what happened in Europe and they didn't learn the lesson. The regulators in the UK and the US did."