Jim Chanos on the liabilities stacked against China’s $3 trillion in reserves

Just back from a trip to Australia and Hong Kong the billionaire short-seller Jim Chanos is warning again that complacency about the rise of Asia in general and China in particular is misplaced. He was interviewed by Bloomberg TV yesterday (click here)

China is the last of the post-2008 bubble economies and will implode like any other over-inflated emerging market. They said it could not happen in Dubai until it did three years ago almost to the day. It is no different in China.

Chinese miracle ending

Chanos says ‘I think we probably came back a little bit more bearish….Our concerns about what we saw in Australia: an economy clearly tied to China has hitched its wagon to the tail of the tiger. In terms of the general complacency, what we heard over and over from investors and clients and potential clients is, ‘yes, yes, there are some excesses, but the government will figure out a way. That the government is this all-knowing, omniscient basic entity that will not prevent me from losing money.

The achilles heel for Australia is its reliance on China, notes Chanos: ‘[The Chinese government] doesn’t [have money], and that’s the problem. The banking system in China is extremely fragile, and that’s one of the messages we wanted to get to people.

‘In fact, because what happened the last two crises, in ‘99 and ‘04, when non-performing loans went crazy in China without even a recession, the Chinese banking system was not re-capitalized like ours was, it was papered over. Going into this credit expansion, Chinese banks are sitting on lots of bonds from the so-called asset management companies set up in 1999 and 2004, and they are keeping them on the books at par, at full value.

‘In the case of Agricultural Bank of China, which we’re short, those restructuring receivables are equal to over 100 per cent of their tangible book. The Chinese banking system is built on quicksand, and that’s the one thing a lot of people don’t realize. When they talk about the foreign reserves of $3 trillion, what everybody forgets is there’s liabilities against that.

Systemic problems

‘Everybody seems to think it is a free and clear open checkbook. It’s not. That is what we have been trying to tell people. Focus on the lending system over there, because everything occurs through the banking system.

‘Property prices and transactions are really beginning to decelerate. We saw that starting in August, that’s continued into November. Transactions are down 40 to 50 per cent year over year in the tier 1 through 3 cities. Prices are down. In some cases, we’ve seen riots in sales offices, where people are amazed that prices could actually go down.

‘There’s lots of indicators on the side. There’s a growing sense that the Chinese government will ease. We point out that credit this year will grow between 30 and 40 per cent of Chinese GDP. If that’s tight, I’d hate to see it ease.’