Blogs & Comment

China the next Enron?

Legendary short seller Jim Chanosrecently equated China to the next Enron. I dont usually pay attention to soothsayers and seers, but domake exceptions for a few like Warren Buffett — andChanos
Because of the unlimited potential for losses and the long-run tendency for stocks to go up, short sellers have to really do their homework. They are the market players where the most painstaking and unbiased of research is likely to be found. And Chanos, who called the Enron disaster, is one of the best in this field. Thats why Im willing to listen.
Chanos sees a big speculative bubble in China, which is also having a knock-on effect on global commodity prices and shipments. And he sees that Chinese property stocks have recently roared back to recoup the 20% correction earlier in the year.
He also sees extensive overbuilding in the Chinese economy, for example apartment complexes going up beside complexes that are still vacant. Construction spending is 60% of GDP and to keep the numbers up, the authorities have to keep building more of what they already have enough of. China is on, to use his words, a treadmill to hell.
Chanos believes Chinese authorities are serious about reining in the bubble-like economy. He expects they will introduce additional tightening measures in the fall. Many expect a soft landing but Chanos says history suggests the ending to these kinds of excesses is not usually gentle. Thus, he is short the property developers and basic commodity producers, especially those based in Australia and Brazil.
Many people think China has moved toward a capitalist economy but the reality is a vast amount of economic activity originates from state-controlled companies and banks. China, in essence, is still a centrally planned economy. The implication seems to be that when all is said and done, true capitalist economies like those in the West, will once again prove their worth — despite their currently daunting problems.
For more from Chanos, see the video clip at Shocked Investor.