Jim Chanos, who operates the Kynikos Associates hedge fund, is a legendary short-seller known for his exhaustive research and good timing. He made a fortune by shorting the stock of Enron.
But over the past year, Chanos has been looking at perhaps an even bigger short — China. He believes the country is in the midst of an extreme real estate bubble. The major concern is over the speculative activity with high-rise office buildings and condos (Chanos gave some of his views on this on CNBC on Tuesday).
Consider that Chanos has a strong grasp of real estate markets — he made big profits during the Texas bust in the 1980s as well from the subprime blowup in 2008-2009.
As for China, he thinks a pop of the bubble could have severe consequences. The impact would ripple across the globe, especially in countries like Australia, Canada and Brazil. There also would be a sudden crash in commodities prices, such as with iron ore and copper. Of course, China is the biggest importer of a wide array of commodities.
So, is this just crazy talk from a short-seller who is pushing his trade? Interestingly enough, the Chinese government also seems to have concerns about the economy. With inflation becoming a problem, it has been ramping up interest rates and tightening capital requirements. While prior efforts have appeared to be temporary, there are now signs that the actions are having an effect. For example, real estate prices are starting to decline.
It’s also a good bet that the Chinese growth rate is likely to fall off from its 9%-12% clip. And yes, investors are getting jittery as many well-known Chinese stocks have had a tough time lately. On Tuesday, there was a big selloff in the Internet high-fliers. Sina’s (Nasdaq:SINA) shares were off 9.5% and Baidu’s (Nasdaq:BIDU) stock saw a drop of 5.2%.
But since China has a highly controlled government, won’t it be able to manage a soft landing? Perhaps. But Chanos points out that a whopping 70% of the country’s gross domestic product is in fixed-asset investment. This is much higher than the percentages in Japan during the late 1980s.
Other top investors are getting cautious on China. A notable one is Jeremy Grantham, who is the chief investment officer of the $107 billion Grantham Mayo fund. He thinks there is a 25% chance that China will slow down over the next year.
In light of all this, it may be a good idea for investors to lessen some of their enthusiasm in China-related stocks.