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Jacob Wolinsky
Jacob Wolinsky
Articles  | Author's Website |

Is the Yuan OVERVALUED? Jim Chanos Thinks So

May 20, 2011 | About:

After the collapse of Enron, one man came into the spotlight for his prediction of the decline in the stock of Enron. That man was Jim Chanos, president of hedge fund Kynikos Associates.

In October 2000, Chanos examined Enron Corporation’s mark-to-model accounting, which according to Chanos lead to overstatement of company earnings. From his research into Enron, he hit upon the realization of the company’s low (6 to 7%) return on investment. Chanos further investigated and began to short Enron during which time the company suffered a dip in the stock price from $90 to $1. Enron declared bankruptcy in late 2001.

In early 2010, Jim Chanos expressed his fears regarding China’s economy, contradicting the common notion of economists’ prediction of a sustained boom. Chanos stated that the country is going through a hyper-stimulated stimulus and is headed for an inevitable crash. Despite providing hard evidence of real estate bubble that existed in China many people at the time derided Chanos for being a “doomsday sayer.” It is now nearly universally accepted that the Chinese economy is overheating, with the Chinese government raising interest rates, and raising reserve requirements at banks.

Most economists have long argued that China is keeping its currency low through artificial means to make their exports comparatively cheaper than other countries. Fred Bergsten of the Peterson Institute stated that the yuan is 25% to 35% undervalued against the U.S. dollar. and despite China’s claim of easing the control on its currency which led to a 3% appreciation against the dollar, it must be noted that the dollar itself went down against all currencies during that period. Nearly every economist in the world agrees with Bergsten, and has argued that the Chinese yuan is undervalued, except Jim Chanos. Chanos has put forward some reasonable arguments regarding the currency actually being overvalued.

Very few people realize that China’s exports make up only 5% of the country’s overall economy. What the main concern should be is not the weak currency which favors Chinese exports, but the fact that China is in midst of a dangerous housing bubble which could topple down the entire economy of China when it bursts.

According to Chanos, it is not the exports that are driving the economy to the assumed "sustained boom," but it is the construction which is causing the boom. Construction of fixed assets make up more than 60% of China’s GDP. Almost a quarter of the total 60% fixed asset investment can be ascribed to real estate investment. What China is witnessing is a real estate bubble and a credit bubble. China’s credit is on the rise at a pace of 25% to 35%, which is three times faster than its economic growth.

Chanos has been on China’s case for over two years, during his research on commodity prices and stocks of big mining companies, he realized the boom in the demand for basic construction material which was attributable to China. His analysis of the Chinese economy is based on the publicly available reports of the country’s Bureau of Statistics and the National Development and Reform Commission.

The speculation surrounding China’s real estate is undeniable today (as mentioned above), as the Chinese government stiffened the financial requirements and the number of real estate purchases a single investor can make. What drives the investors of China to fanatically invest in the real estate sector is compounded by the fact that the standard banks of China offer a negative return on investment, the stock markets are highly volatile and individuals restrain from investing abroad, leaving the real estate sector as the only attractive option backed with proof of years of stable profitable growth in the sector. Even though, rents are low in China, some individuals have been purchasing dozens of homes not to rent, but instead just purchase and wait for the value of the real estate to go up.

Chanos compares the current situation of China to that of Dubai few years ago, Thailand and Indonesia during the 90s Asian crisis and Tokyo’s case in 1989; the main highlighted fact being that real estate bubbles ALWAYS end up badly. Despite the argument that the burst of the housing bubble would not significantly impact the financial systems of China as housing finance is done the "old-fashion way" with large down payments, and a lack of leverage throughout the system, Chanos affirms that LGFVs (Local Government Financing Vehicles) have more debt than they like to admit. Additionally, Dubai required very large down payments and still suffered an awful real estate downturn.

Therefore, once the housing bubble bursts, bad loans will increase with more intensity than before, which will ripple throughout the Chinese financial system.

Jim Chanos’ argument about the yuan seems valid when taking into consideration the facts and figures related to the real estate sector of China. If his thesis holds true, then Yuan is undeniably overvalued, when keeping in mind a crippling down of the Chinese economy in the near future caused by the burst of the real estate bubble. Additionally, if the Chinese economy starts to crash, investors will flee to “safer” currencies like the dollar (as they did in late 2008) which will further lead to a decline in the yuan. Jim Chanos is the only person I know of who argues the yuan is overvalued, and there is a good chance he is right.

Disclosure: None

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website

Rating: 2.7/5 (12 votes)


Zach Jefron
Zach Jefron - 5 years ago    Report SPAM

It's always nice to hear the crowd collectively favouring the upside of the Yuan. Especially, if you have doubts about the real estate sector and the corrolating currency downside if that big bubble bursts.

In addition, I've been looking for shorting opportunities on China's real estate. The only exposure I have stumbled across appears to be the whole China sector and emerging markets (These come in the form of ETF shorts). Any suggestions for the smaller investor to gain some exposure on China's real estate downside?
DfiinancialH - 5 years ago    Report SPAM
this is insane
Sivaram - 5 years ago    Report SPAM
Chanos isn't always right but if the Renimbi ends up being overvalued and falls during a crisis, it'll shock the world... and probably set off trade wars too.
Yswolinsky - 5 years ago    Report SPAM
What is insane?

I agree Sivaram although I think the trade war has been heating up for over a year already, basically almost everyone vs. China.

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