China is heading into an economic storm, Marketwatch

By Sue Chang, MarketWatch

NEW YORK (MarketWatch) — China is heading into an economic storm, and the much-feared hard-landing of the world’s second-largest economy has already started, warned celebrated hedge-fund manager and China-bear Jim Chanos of Kynikos Associates on Monday.

“The numbers are falling faster than we thought,” said Chanos during an exclusive interview with MarketWatch on the sidelines of the 7th Annual New York Value Investing Congress.

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“Real estate sales in September and October, which are peak months, fell 40%-60% on-year,” he said.

Chanos also pointed out that Chinese financial and real-estate stocks are down 30% from their peak, while cement and steel prices are declining.

“People are buying into the idea of perpetual growth,” Chanos said. “But they have to ask, ‘Are you really growing?’”

Chanos stressed that investors should understand that there is no bailout without a cost.

“The only way the Chinese government can continue to bail out everyone is to print more money, which will lead to inflation. But people are depositing money [in banks] at below inflation,” the fund manager said.

Chanos had already suggested back in May that there were clear signs of excess supply in China’s commercial real-estate sector.

About 14% of office space in Beijing and 9% in Shanghai was vacant, according to data he cited at the time.

“Western investors must remember that Chinese consumers are not the next big hope,” he said.

1,000 times worse than Dubai

Chanos has consistently said China’s bust will be a thousand times worse than Dubai.

“It’s very hard to let air out of a property bubble without collateral damage,” he said.

Chanos also expressed concerns about the country’s banking sector.

The Chinese economy is adding $2 trillion of new debt every year, and half of that is problematic from day one, he said.

And since only 50% of the problematic debt is recoverable, about $500 billion, or 10% of gross domestic product, is bad debt, he said.