- Screenshot via Bloomberg TV
Jim Chanos, the founder of Kynikos Associates, has spent years telling the world that the Chinese economy is a “treadmill to hell” running on debt.
Now, with a few big market scares coming from China over the past year – a currency devaluation, a few stock market crashes, and economic indicators flashing red – he is looking pretty prescient.
So during an interview for our “Hard Pass” podcast, my colleague Josh Barro and I asked Chanos what’s happening in China right at this moment. His view is still pretty grim.
One thing he is seeing is that, in a very telling way, China’s financial system is looking a lot like Wall Street’s investment banks just before the most recent crash.
“One other problem people aren’t paying enough attention to – and that is the asset-liability mismatch,” he said. “And if we learned anything … during our crisis, it was you shouldn’t finance hard-to-value long-term esoteric real-estate-related derivatives or securities with overnight money, which is what a lot of the investment banks ended up doing by ’07/’08. They couldn’t move a bunch of the gunk on their balance sheet and increasingly they were financing themselves in the repo market.”
That is now happening in China, Chanos said. Banks are financing uneconomic projects and/or losses with debt carried on the balance sheets of Chinese banks. That debt is then being financed overnight in the repo market.
All of that is swirling around in the country’s $33-trillion-and-growing banking system.
A few more points Chanos hit:
- Chinese President Xi Jinping has been a more repressive, inward-looking leader than anyone expected. He has taken “steps backward” from the reform the world expected by moving against the army, the media, and the internet (which he sees as an alternate power base) in general. “We’re getting in some pretty scary debt to capital numbers in China,” Chanos reminded listeners. “We’re 300% of GDP as opposed to 100% of GDP the last time they had a big problem.” Countries that depend on China for trade represent 40% of global gross domestic product. “So if China really does go into decline, it’s going to take a lot of countries down with it,” Chanos said.
Check out the full episode below: