Taps Coogan – October 25th, 2021

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Legendary short seller and founder of Kynikos Associates, Jim Chanos, one of the first serious ‘China bears,’ spoke to CNBC to warn about why the Evergrande collapse poses ‘1930s’ like problems for the Chinese economy.

 

Some excerpts from Jim Chanos:

“The problem that we are seeing with Evergrande… is not that it’s a Lehman moment, it just underscores the fragility of the Chinese economic model and one of the concerns that I have is how they transition away from this ‘apartments-for-everybody’ economic model to something more sustainable and what concerns me is the rise of authoritarianism, the rise of defense spending, and will China try to redeploy capital assets from building apartments to building aircraft carriers? I don’t know… but they cannot continue down this road and that’s the lesson we have to learn… This reliance on construction just is not sustainable. And yet, in the GDP they just reported over the weekend, investment was the lion’s share of the growth again. It really is this treadmill to hell that we’ve talked about for the better part of ten years.”

With regard to a transmission to US investors:

“The transmission is secondary or tertiary. It’s through commodities. It’s through a variety of other things. I think the risks are more moving toward the political (rather) than the economic these days because we see a more bellicose China, a China that’s increasingly rattling sabers about Taiwan, and so I think that investors need to keep an eye on that particularly considering the importance of Taiwan strategically to the chip business and for lots of other reasons in that area…”

Mr. Chanos detailed his views in greater detail last week in a must-read interview with The Institute for New Economic Thinking’s Lynn Parramore. In that interview he notes:

“We’ve never seen anything like this. And there’s no game plan, no historical analog. Maybe Tokyo in ’89? But this is worse than that. It’s worse than Spain in ’06 or Ireland in ’06. We’ve just never seen an economy this dependent on putting up apartment buildings — apartments that nobody is residing in. Everybody already has an apartment! These additional ones are second and third apartments at this point, and only for people who can afford them because they’re extremely expensive.”

“I think the Chinese government has convinced themselves that by borrowing lots of money from their own citizens and elsewhere, that there’s ongoing activity that is sustainable. But as we find out in every real estate bubble that bursts, when your activity is constructing real estate itself and you’re taking capital and turning it into income by paying construction workers and real estate brokers and everybody else, when that activity ends, it goes poof! And there’s no income from the asset you’ve just financed. It’s not like building a factory where you have demand for your products. It’s just apartments sitting empty in Beijing or Shenzhen.”

China’s ‘economic miracle’ was built on three basic planks.

The first was using it’s massive low-wage/slave-wage workforce, once the largest in the world, to soak up the world’s low end manufacturing industries. That game is fast ending as China’s workforce shrinks and India continues to improve access to its even cheaper, larger, and faster growing workforce. Bellwether companies like Samsung, Apple, and Foxconn are rapidly shifting production from China to India, even for relatively high end electronics.

The second was it’s centrally planned construction bubble, which as Mr. Chanos details above, has finally run out of track.

The third was lying about it’s economic numbers, which is likely to remain as the main growth industry left in China.

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