http://www.valuewalk.com/2015/05/jim-chanos-china-debt-bubble/
Economies and stock markets are not synonymous. However, with the Chinese economy grinding to a halt and Shanghai Stock Exchange Composite Index ripping higher, few times in history have we seen such stark contrast. So, what is the “reality” in China? The answer is complex and obscured by opaque reporting, but the trillion dollar question for investors is how a Chinese “hard landing” will impact fragile world economic recoveries and financial markets. Starting in the 1980s, China recognized the need to put hundreds of millions of people to work and transition into a less agrarian, more manufacturing-based export economy. Free trade theory says that from 1990 from 2013, the value of the Yuan should have tripled, but instead, due to active suppression, the currency lost half of its value during that time. For the last decade, Chinese officials have allowed the Yuan to appreciate slightly to further transition to a more balanced and consumer-driven economy, but the credit-fueled experiment has largely failed.
To give some perspective, Jim Chanos stated on Wall Street Week that when his firm, Kynikos Associates, began digging deeper into China’s fundamentals in late 2009, it had 15% nominal GDP growth – 10% real, 5% inflation, while today it has 5% GDP growth – 7% real, 2% deflation. During those years of torrid economic growth, China’s stock market stagnated as little of the wealth accreted to equity investors. Now, the opposite is happening: China’s economy is the boulder that can’t be pushed up the hill, but more money is finding its way into shareholders’ pockets. Why?
First, you have to understand the problems in China are a credit story, not an equities story. Jim Chanos has been outspoken about shorting China over the last several years, but says his firm has never had an interest in betting against the Shanghai Index. The country is suffering from a massive debt overhang that is a result of the “grow at all costs” mentality. Local debt, not federal debt, is the issue. Municipalities overdosed on debt to finance projects, like ghost cities, that have seen little return. Underperforming loans, especially in the housing sector, now weigh heavily on bank balance sheets. Chinese government debt is only around 65% of GDP, but when you factor in local, corporate, and household debt, the number looks at lot scarier at around 290%. Jim Chanos believes that in a few years, China’s debt-to-GDP could resemble the 400% levels seen in troubled Eurozone pariah Greece.