In-depth analysis on Credit Writedowns Pro.

Jim Chanos: China has tons of contingent debt via state-owned enterprises

The overall gist of Jim Chanos’ comments on Bloomberg yesterday were that China has off-balance sheet contingent liabilities due to its implicit commitment to state-owned enterprises which are knee-deep in land and property speculation. This speculative excess will lead to credit writedowns. Chanos repeated his contention from CNBC last week that he is net short China as a result, a bet Hugh Hendry has also been making – with spectacular results recently. See Michael Pettis piece on The debt-financed investments of Chinese state-owned enterprises for a comprehensive analysis of this problem.

Bottom line: expect a slow down in China – how much of one is still up for debate. Anything above 7% GDP growth should be considered a soft landing though. Below that 7% number, analysts would consider that a hard landing.

P.S. – this is the kinds of excess we’re talking about right here.

Bloomberg Television sent me the following partial transcript:

On the Chinese government’s balance sheet:

"The Chinese government’s balance sheet directly does not have a lot of debt. The state-owned enterprises of the local governments and all the other ancillary borrowing vehicles have lots of debt and its growing at a very fast rate. The assumption is that the state stands behind all this debt. We see that the debt in China, implicitly backed by the Chinese government, probably has gone from about 100% of GDP to about 200% of GDP recently. Those are numbers that are staggering. Those are European kind of numbers if not worse."

On how a Chinese property bubble will play out:

"I think that will be the surprise going into this year, and into 2012 – that it is not so strong. The property market is hitting the wall right now and things are decelerating. The CEO of Komatsu said last week that he is having trouble getting paid for his excavator sales in China. Developers are being squeezed. They’re turning to the black market for lending, this shadow banking system that is growing by leaps and bounds like everything in China.

"Regulators over there are really trying to get their hands around the problem. In the meantime, local governments have every incentive to just keep the game going. So they will continue with these projects, continuing to borrow as the central government tries to rein it in."

Chanos on his long and short positions:

"We are short Chinese banks, the property developers, commodity companies that sell into China, anything related to property there is still a short."

"We are long the Macau casinos. It’s our long corruption, short property play. We feel that there’s American management and American accounting. They are growing at a faster rate even than the property developers."

On the IMF lowering growth estimates for China:

"A lot of people are assuming that half of all new loans in China are going to go bad. In fact, the Chinese government even said that last year relating to the local governments. If we assume that China will grow total credit this year between 30% to 40% of GDP, and half of that debt will go bad, that is 15% to 20%.  Say the recoveries on that are 50%. That means that China, on an after write off basis, may not be growing at all. It may be having to simply write off some of this stuff in the future so its 9% growth may be zero."

Source: Bloomberg Televison

video below (click here if you are using Google Chrome)

 

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

3 Comments

  1. Lawrence says:

    This moronic Jim trying to throw mud on the wall hoping that it will stick. Why must he kept on condemning China when none of his prediction came any near the truth? End of 2010 he said that the bubble will burst in 2011, now he say it will be 2012 and by then will say it will be 2013. If he is really that smart he should have made a lot of money, maybe trillions, simply by closing his eyes and short the US and Europe markets.No need all the rubbish analysis and condemnation.

    • Anonymous says:

      He’s got more money than you’ll ever have, not because of rubbish analysis and childish comments like yours.