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Fortune: Chanos Vs. China
Posted by: guruek (IP Logged)
Date: December 13, 2010 01:50PM

Fortune published an article entitled “Chanos Vs. China” by contributor Bill Powell. James Chanos is the central figure of the article and he is well known for his bearish view towards China.

Chanos has been vocal on China’s pending collapse for some time now. So there really nothing we have not heard of. Essentially he is saying China’s economy is too much relying on construction (60% of GDP) and hence soon or late it will collapse.

What is fresh in the article is that it talked about a few specific trades that Chanos is supposed to have placed. For the interest of our readers, here they are:
Chanos puts his money where his mouth is. Late last month he went before the Grant's Interest Rate Observer conference at the Plaza Hotel in Manhattan and not only made his case for being bearish on China, but ticked off individual stocks that he is shorting. Poly HK is one: a real estate developer that trades on the Hong Kong exchange (and a company that Goldman Sachs (GS) recommended as a buy as recently as last month). It's a state-owned company that started out as a defense contractor but, enticed by the real estate boom, has plunged in as a property developer. Chanos is also short the listing for the Hong Kong Stock Exchange. And he believes that China Merchants Bank, one of Beijing's largest, is deeply exposed to the financing affiliates of local governments throughout China. About 11% of its total loans outstanding, according to Chanos, are to these local financing affiliates (known as local government funding vehicles, or LGFVs).

Why does that matter? A key prop under the bullish case for China's real estate market is lack of leverage. The financial system is simply not going to be at risk, the thinking goes, even if there is a real estate bust. But Chanos believes the LGFVs are deeply exposed to property development, and that if there is a turn in the market, the pain felt by China Merchants Bank, as well as others, will be considerable. Victor Shih, a professor at Northwestern University, did a study earlier this year and concluded that these LGFVs accumulated $1.6 trillion in new debt from 2004 to 2009. As Chanos points out, China's own bank regulator has recently been moving to rein in local borrowing, after concluding that 26% of the outstanding debt is "high risk."

A downturn in China would have serious ripple effects throughout the world. Chanos believes the iron ore producers, and Brazilian giant Vale (VALE) in particular, will be victims. China's huge capital investment has required vast amounts of steel and other metals, and that in turn has made it the largest market in the world for iron ore. Vale traded in early November near a 52-week high, and its CEO, Roger Agnelli, recently boasted that he has the biggest fleet of ships in the world outside of the U.S. Navy. If you take Chanos's view of the world, that's not a good thing. As he put it, "They're going to have a lot of empty ships on their hands."


Read the complete article here.

Watch the video that accompanies the article:






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Fortune: Chanos Vs. China
Posted by: paulwitt (IP Logged)
Date: December 13, 2010 11:51PM

When I heard China is raising capital requirements for banks, that sounded like a conservative, prudent approach to a banking problem. To me, it sounds like they know what they're doing....





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Fortune: Chanos Vs. China
Posted by: gmax (IP Logged)
Date: December 14, 2010 05:30AM

Would be very interested to know how he shorts Poly HK .

Short selling on the Hang Seng can only be done via Derivative Warrants ( DW ) ;i.e. Puts and Calls.

The only DW for Poly HK I found were Calls.

Any advice is most appreciated

K

Shanghai


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Fortune: Chanos Vs. China
Posted by: Sivaram (IP Logged)
Date: December 14, 2010 10:31PM

Are you sure you can't short sell stocks directly on the Hang Seng? According to this article, Hong Kong is the #1 short-selling market in Asia.

Poly HK appears to trade on the Pink Sheets OTC market in USA so maybe that is also an option... I'm not sure if you can short sell pink sheet stocks though (anyone know?)...


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Fortune: Chanos Vs. China
Posted by: gmax (IP Logged)
Date: December 14, 2010 11:41PM

Thanks ! You are right but shorting is very restricted and mostly available for the large and mega caps only from my experience.

The Poly OTC is not available on my brokerage platform.


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