Jim O’Neill, former head of Goldman Sachs Asset Management, coined the term ‘BRIC’, and is a huge bull on China.
Jim Chanos, the CEO of Kynikos Investments and famed short seller, is a massive China bear.
They faced off at the Bloomberg Markets 50 conference, Bloomberg TV’s Tom Keene hosted.
Here we go.
Keene started us off by asking the guys to lay out their arguments.
O’Neill said that “most of the reason” why China has slowed is because it has deliberately slowed, and either way the rate they’re going to grow at this year is equivalent to the U.S. growing at 4%.
Chanos countered the that Chinese model is all wrong. It’s built on credit. So in a sense, he said, “we’re talking passed each other.’ He doesn’t disagree with the number, but what that number is built on is an investment driven model.
“If you’re going to grow net new credit in this economy by 30%-40% you ought well to be growing by 7% real,” said Chanos.
It’s the health of the system, especially banking, Chanos is concerned about. “And by the way I’m using their data,” he said smiling at O’Neill.
This is where things got deep.
“It was blatantly obvious to people three years ago that China was finished,” said O’Neil. The takeaway there (from O’Neill) was that Chanos is shorting the old China and he’s bullish on the new one.
“But there have been so many new China’s!” said Chanos.
“How do you play the recent bounce in emerging markets,” asked Keene, breaking in.
Chanos responded: “I’m looking at Petrobras” (that’s Brazil’s state oil company that Chanos has openly said is subsidizing lower prices for its customers and hurting its own business).
Chanos went on to say that any country in iron ore or mining is in trouble over the next year as well.
But back to China. O’Neill said all the noise in June about another Chinese credit crisis started from the top. It was the higher ups saying, “hey guys this stuff is kind of dumb” to overzealous bank lenders.
Chanos agreed. Still, he pointed out, the new free trade zone the country is building is actually like building another city. Go figure.
Getting into China’s new cities, said Chanos, “is still really a phenomena” of the wealthy.
O’Neill disagreed with that one: “at the margin, that’s changing… the scale of wage increases going on over the last three years… real housing prices are going down.”
Nope, said Chanos. Housing and housing construction are reaching 400% of GDP. Even with wages rising, China simply cannot keep up.
“Where will China be in 5 years,” asked Keene.
O’Neill said they’ll be doubling the average wealth to $US14-15,000 a head and much more like the United States.
Chanos thinks it will be slowed down and that the country will have had at least one credit event. Also, a curveball: “This leadership group may in fact be settling scores, if you will,” he said.