Jim Chanos: China Not Being Able to Bailout the World

One has to understand where China is heading in relation with the U.S. and Europe in the large context. Sure it has plenty of potential problems and has maintained a peculiar relationship with the U.S., as noted many times here. In the meantime, the U.S. situation seems to be messier for now. It seems that both the U.S. and China have learned how to be mutually dependent, which may last longer than one would image. Yet, it has to end at some point. Further, one has to understand where Korea stands in the middle of a global shift.

From Bloomgberg Excerpt:

The Chinese government’s balance sheet directly does not have a lot of debt . The state-owned enterprises of the local governments and all the other ancillary borrowing vehicles have lots of debt and its growing at a very fast rate. The assumption is that the state stands behind all this debt. We see that the debt in China, implicitly backed by the Chinese government, probably has gone from about 100% of GDP to about 200% of GDP recently. Those are numbers that are staggering. Those are European kind of numbers if not worse.

I think that will be the surprise going into this year, and into 2012 – that it is not so strong. The property market is hitting the wall right now and things are decelerating. The CEO of Komatsu said last week that he is having trouble getting paid for his excavator sales in China. Developers are being squeezed. They’re turning to the black market for lending, this shadow banking system that is growing by leaps and bounds like everything in China.

Regulators over there are really trying to get their hands around the problem. In the meantime, local governments have every incentive to just keep the game going. So they will continue with these projects, continuing to borrow as the central government tries to rein it in.

A lot of people are assuming that half of all new loans in China are going to go bad. In fact, the Chinese government even said that last year relating to the local governments. If we assume that China will grow total credit this year between 30% to 40% of GDP, and half of that debt will go bad, that is 15% to 20%. Say the recoveries on that are 50%. That means that China, on an after write off basis, may not be growing at all. It may be having to simply write off some of this stuff in the future so its 9% growth may be zero.

http://www.bloomberg.com/news/2011-09-20/kynikos-s-jim-chanos-discusses-european-debt-crisis.html