Jim Chanos: China in Credit Bubble That’s ‘Huge, Getting Bigger’

Thursday, 25 Apr 2013 07:52 AM

By Dan Weil

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Kynikos Associates founder Jim Chanos, a legendary short seller, has been talking down China for years.

And now, “I actually think it's gotten worse,” he told CNBC.

After the new government leaders came in, “there was another burst of credit expansion,” Chanos said. “And what really has us concerned now, you have credit actually accelerating in China, [even as] GDP growth is still slowing.”

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

Chinese gross domestic product (GDP) growth registered 7.7 percent in the first quarter from 7.9 percent in the fourth quarter. At the same time new credit surged to $1 trillion.

“Now this is an $8 trillion economy. So on an annualized rate, that's 50 percent of GDP,” Chanos says. “So there is a credit bubble that's actually not only huge, but getting bigger.”

So how should investors play China’s sticky situation?

“You look for asset inflation where the asset being inflated by credit does not generate cash to service the debt, so you get the so-called Ponzi finance moment,” Chanos says.

“And that would be almost anything related to real estate or construction in China. So property companies, cement companies, steel. And then, of course, companies selling into that bubble -- iron ore and mining.”

Another sign of economic weakness in China came Tuesday with news that the purchasing managers index slipped to 50.5 this month from 51.6 in March. A reading above 50 indicates expansion for the manufacturing sector.

“This paints a picture of a continued painfully slow recovery for China’s manufacturing sector,” Yao Wei, a Societe Generale economist Hong Kong, told Bloomberg. “The government needs to help translate the easy liquidity conditions into real growth.”

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown



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