Here’s the moment Jim Chanos knew betting against China was a once in a lifetime opportunity

It’s about office space.

Jim Chanos, the legendary short seller who uncovered fraud at Enron before the market, thinks China isn’t growing nearly as quickly as the 7% per year the government says.

In short, Chanos — who runs hedge fund Kynikos Associates — thinks China is an over-indebted tinderbox.

And what’s bad for China will be very bad for the mining and commodities sectors which have benefited from China’s investment boom, as well as for its neighbours and major trading partners.

And the moment he knew China presented a “once in a lifetime” opportunity came down to the absolutely insane amount of real estate his team realised was being built in China.

Speaking with the Financial Times’ Matt Klein on the FT’s Alphachatterbox podcast, Chanos said:

“The story is internally now one of our great stories.

A real estate analyst was addressing the partners and he said: ‘Currently there’s 5.6 billion square meters of high rises in China under construction. Half residential, half office space.’ And I thought for a second and I said: ‘No, you’ve gotten the American, rest of the world metrics wrong. You must mean 5.6 billion square feet. Because 5.6 billion square meters is roughly 60 billion square feet.’

And my analyst looked at me sort of terrified. He was a young analyst at the time. He said: ‘I know. I double checked. It’s 5.6 billion square meters.’ And I thought for a second and I said: ‘Well if half of that’s office space, that’s roughly 30 billion square feet of office space. And that’s a five foot by five foot office cubicle for every man, woman and child in China.’

And that’s when we all looked at each other and our jaws dropped. Realised, wow, this is a once in a lifetime kind of thing, where this whole country is in effect building itself out in a very short period of time.

So then we looked at the capital spending of these miners, and we went back and looked at a time series of those that were around from 1990 on, and once again it was just one of these hit your head kind of moments.

Chanos added that plain and simple, there’s a credit bubble in China. The country has borrowed heavily to build out its economy and power growth, making it the driver of demand for commodities and the engine for churning out cheap goods to the rest of the world.

And with the government’s explicit backing to do whatever it takes to keep China growing faster than the rest of the world’s major economies, Chanos outlines that right now markets believe in two things: central banks have the market’s back and China has the global economy’s back.

“Those are two very, very big pillars and they’d better hold up,” Chanos said, “because everybody believes them.”

For more insight on the art of short selling and what else Chanos finds interesting in markets and the economy, listen to the whole conversation here or read the transcript here.

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