For years, Jim Chanos, founder of Kynikos Associates, has been 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 last year — a currency devaluation, a few stock market crashes and economic indicators flashing red — he’s looking pretty prescient.
So my colleague Josh Barro and I asked Chanos what’s happening in China right at this moment, during an interview for our Hard Pass podcast. His view is still pretty grim.
One thing he’s 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 crash.
“One other problem people aren’t paying enough attention to — and that is the asset-liability mismatch. And if we learned anything… during our crisis, it was you shouldn’t finance hard-to-value longterm 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,” he said.
That’s what happening in China now, according to Chanos. Banks are financing uneconomic projects and/or losses with debt carried on China’s bank balance sheets. 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:
- Xi Jinping has been a more repressive, inward looking leader than anyone thought. He’s 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 GDP. “So if China really does go into decline, it’s going to take a lot of countries down with it,” said Chanos.
Check out the full episode below: