Jim Chanos was on CNBC talking about, amongst other things, China. And while he is bearish on China, the quote that jumped out at me was the one in the title.
He is bearish on China because of an unprecedented credit-induced bubble in Chinese real estate. He quotes 30 billion sq. ft. of construction underway a 5×5 space for every man, woman, and child in China. However, that doesn’t mean the economy is going to collapse.
It does mean that a huge amount of malinvestment is building up in particular sectors and will certainly reduce efficiency and investment returns. You can only deviate from the market-clearing price for so long. Eventually these command and control manipulations will come a cropper. Chanos says that China has needed ever more fixed asset investment to keep the gravy train going.
Areas where there will be contagion in the West are building materials like cement (think Cemex) or copper. Chanos says:
I would be very leery of any companies that are exporting raw materials into China to build up this real estate bubble.
In short: an historic capital spending boom has produced a bubble and serious malinvestment the implications of which, at a minimum, will be very negative for companies leveraged to capital investment once the boom collapses. Chanos is not making any macro predictions.
Interesting quip from Chanos at about 6:15 in the video below:
China has embraced capitalism to keep the socialist elites entrenched while, more lately in the west, we’ve embraced socialism to keep the capitalist elites entrenched.
Chanos also has a few words to say on Obama’s recent proposals (like me, he is against the bank levy but for the prop trading/leverage proposals). The video is below.
Click for Video
Originally published at Credit Writedowns and reproduced here with the author’s permission.
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