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Mad Hedge Fund Trader

Mad Hedge Fund Trader

John Thomas, The Mad Hedge Fund Trader is one of today's most successful Hedge Fund Managers and a 40 year veteran of the financial markets.…

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Why Jim Chanos is Wrong About China

Hedge fund titan, Jim Chanos, is well known for his extremely bearish views on China. He says that the cracks are spreading on the façade, real estate sales are falling, and that the economic engine is starting to sputter.

This will be bad news for the rest of us, as China imports 50%-80% of the world’s commodities. Commodity exporting countries will be especially hard hit, like Canada, Australia, and parts of the US. Modern China has only seen a bull market, and he doubts their ability to manage a true crisis.

There is a widespread misperception that the government will step in and provide any bailouts that will be needed. The domestic Chinese banking system has in fact already been bailed out two times. The harsh reality is that while Chinese companies are selling billions of dollars’ worth of new stock issues in the US through IPO’s, a privileged elite is getting their money out of the country as rapidly as they can. Jim says that he already has short positions in the Middle Kingdom that are profitable. There is no way that even a wrinkle in a market of this size is without global implications, and on that point Jim is right.

However, I think that Jim, who confesses to having never visited China, is missing the broader long term picture here. China has literally been building a Rome a day, the ancient kind, and the modern size every two weeks. In a year, it builds the equivalent of the entire housing stock of Spain, and in 15 years the equivalent for all of Europe.

While a lot of apartment buildings have been built, the country is rapidly creating the middle class to fill them. Even allowing for a pull back from its current blistering 10% per annum GDP growth rate, urban disposable income per person is expected to grow by 2.5 times to $7,500 by 2020. Over the same time frame, some 160 million are expected to move from the hinterlands to urban areas. Rising standard of livings mean that residential floor space per person will jump from 270 square feet to 369 square feet, still tiny by Western standards. That is a lot of housing demand.

China has already taken steps to head off a housing crisis, unlike the US. The People’s Bank of China has raised bank reserve requirements five times this year, now close to 20%, taking them to among the most stringent levels in the world. That is almost Canadian in its conservatism. Many banks are now demanding cash deposits of 40%, well over the official requirement of 30%. The government is in effect forcing the banks to deleverage before hard times hit. Too bad they didn’t think of that here.

I think China still has several good years ahead of it, and I am going to pile into the stock ETF (FXI) and the Yuan ETF (CYB) as soon as the current bout of “RISK OFF” selling exhausts itself. The Country’s real challenge arises when its demographic pyramid starts to invert in about five years, the result of a then 35 year old “one child” policy, when too many single children have to start supporting two retiring parents.



By. Mad Hedge Fund Trader

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  • Anonymous on May 23 2011 said:
    Very good paper. Of course, if the two retiring parents have pensions, the single child might be able to....Anyway, I think that the Chinese government will find a solution to any difficulties that might appear in the near future, and maybe even further down the line. Like OPEC, they know how to play the 'I win, you lose' game.
  • Anonymous on May 23 2011 said:
    Starting with residential real estate, the properties being created are high end and no where near affordable for the "middle class" or the 600 million people who make less than $6 a day, even if wages double tomorrow. In Las Vegas and Miami, there are empty condos. In China, they have built empty cities. Land prices have risen 800% since the 2002. Previous bubbles in US, ASEAN in late 90s, and Japan in the late 80s, saw prices give up 80% of their gains. The bubble is not just in residential real estate. In their office space market, they built enough to give every man woman and child a 5 x 5 private office. They have the same amount of highways as the US, but have 1/10 the number of cars, the same number of bridges but 1/7th the rivers. They are building 10 airports a year, which are empty. They are building trains in 2 years that would take 10 here in the US amid corruption and shody construction. more...
  • Anonymous on May 23 2011 said:
    (continued)China, and the rest of the world, will be lucky to escape with just an economic crises, they may have an internal or external political one as well. Indeed, according to one model, they have an 80% chance of escalating violence against the government according to one model (11th highest in the world, based on oppression, food prices, corruption, etc. This is without a banking crises and bailouts, which is another factor in the model. Furthermore, there is a rise in Maoism among both the people and next crop of leadership, who are dischenhated by materialism and corruption.
  • Anonymous on May 24 2011 said:
    Comment text: I'm really curious as to how the Chinese will solve the population issue. Everything else is easy for a smart government, and the Chinese government is as smart as they come. Of course, whether they decide to use their 'smartness' in an optimal manner is quite another matter. Who knows, they might end up with a Chinese George E. Bush calling the shots.
  • Anonymous on May 24 2011 said:
    If they don't get inflation under control, they may end up with another Hitler, not George Bush. Hitler arose in the 30s following the hyperinflationary 20's of the Weimar Republic. They appear serious at slowing growth. But when it slows quickly, will they again step on the gas (eventually to drive off a cliff). Hopefully they let a recession happen and purge the excess credit, massive overbuilding, and institute reforms. Regardless, nationalism and Maoism is a trend on the rise. This is not good for political or economic freedom in China, international investors in China, or for the safety of the world politically.
  • Anonymous on May 24 2011 said:
    Yeah, China's been setting up "Romes" all over the place, that's for sure. Here's the result of some of her "Romes":- Ordos has been mostly empty since completion back in '05.- Dantu has been empty for over a decade.- Erenhot sits half empty; the other half is incomplete.- Zhengzhou New District has a high vacancy rate.- The South China Mall (not a city obviously but serious investment nevertheless), which was completed in '05 and hailed as the world's largest mall based on gross leasable space, sits 99% empty.For a little perspective, let's take a trip down memory lane: Dubai, during her construction boom, too required steep deposits on condos, but she still suffered a crippling crisis.Let's not forget just a few years ago, a group of giddy US investors went ape over subprime mortgages.
  • TTO on January 17 2012 said:
    Chanos again?? This old man is either insane or out of this world. What is happening in China stock market happens everywhere and influenced by more or less of the same factors. None of his nonsence for the last 2 - 3 years ever materialise. He will be another clown or an idiot for the coming 3 - 4 years. Better concentrate on something more useful in life rather than guessing the next doomday.

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