Overheating in China presents shorting opportunity

Overheating and overindulgence in China are presenting a significant shorting opportunity according to noted hedge fund manager, Jim Chanos, president and founder of New York-based Kynikos Associates, who was speaking at a London School of Economics event.

Chanos, renowned for predicting the demise of Enron, said one of the main problems is the veracity of economic statistics in China with a clear disparity between regional and national gross domestic product figures that make it impossible to measure the true level of economic activity.

Speaking at the LSE’s Alternative Investments Conference, he said much like his analysis of Enron, the numbers out of China simply did not add up.

He compared China to Asia’s “paper tigers” of the 1990s arguing that if the growth miracle is based on the expanding quantity of inputs rather than increasing productivity, the economy will be subject to the law of diminishing returns. There will be no medium- to long-term sustainability of the rapid growth that has been experienced.

He said China had experienced a 12-year long investment boom which is one of the main reasons for its overcapacity.

He also predicted that the excessive growth of credit in the last years and diversion of stimulus funds to real estate are likely to be followed by a credit-fueled boom and a bust. He said 20 per cent of office space in Beijing and 16 per cent in Shanghai is vacant, in 2009 office rents fell by 22 per cent in Beijing and 26 per cent in Shanghai, and 2.6 billion square metres of non-residential real estate is currently under construction.

He said he would target commodity- and materials-orientated companies that are major suppliers to China, allowing him to express his bearish view while limiting counterparty risk.