Chanos Says Chinese Lenders ‘Deteriorating’ as Government Purchases Shares

By Michael Patterson and Saijel Kishan - Oct 12, 2011 1:38 AM GMT+0700
Enlarge image

Kynikos Associates Founder James Chanos. Photographer: Daniel Acker/Bloomberg

Play Video

Oct. 11 (Bloomberg) -- Jim Chanos, founder of Kynikos Associates Ltd., discusses China's economy, banking and real estate industries. Chanos, speaking with Michael McKee from the Global Alternative Investment Conference in New York on Bloomberg Television's "In the Loop with Betty Liu," also talks about his investment strategy and the 2012 presidential race. (Source: Bloomberg)

Jim Chanos, the hedge-fund manager who’s been betting that Chinese bank stocks will tumble, said a rally spurred by government purchases of the shares hasn’t changed his bearish outlook.

The MSCI China Financials Index surged 6 percent today after state-run Central Huijin Investment Ltd. started buying shares in the four biggest Chinese lenders. The gauge of banks, insurers and developers had tumbled as much as 43 percent in 2011 through Oct. 4, sending its price-to-earnings ratio to a record low of 5.6 on concern that slowing economic growth will spur bad debts after a three-year credit boom.

“The fact that people are even talking about the government stepping in to shore up the banks, when two months ago people thought there was nothing wrong with the Chinese banks, should tell you just how seriously this situation is deteriorating,” Chanos, founder of New York-based hedge fund Kynikos Associates, said in an interview with Bloomberg Television’s Michael McKee today.

Chanos, who told Bloomberg News last month he was selling short shares in “virtually all of the large banks in China,” said today that the country’s property market is in the “first parts of a very serious pullback” and that he’s also betting against Brazil’s Vale SA (VALE), the world’s largest iron-ore producer, on expectations demand from China will slow.

China’s home transactions fell during last week’s public holidays after residential prices posted their first monthly decline in a year, according to Soufun Holdings Ltd. (SFUN), China’s biggest real estate website owner.

Huijin Purchases

“The property market is what investors ought to be watching, because that drives everything in China,” Chanos said.

Huijin started buying shares of Industrial & Commercial Bank of China (601398) Ltd., China Construction Bank Corp. (939), Agricultural Bank of China Ltd. (601288) and Bank of China Ltd. (3988) yesterday, according to a statement on the the investment company’s website. Huijin, set up to hold the government’s stakes in the banks, said it will continue with “related market operations,” without providing details on how much it will buy.

The unit of China’s sovereign wealth fund spurred a temporary rally in Chinese banks in September 2008 as it bought shares to shore up investor confidence after Lehman Brothers Holdings Inc. collapsed.

‘Move is Symbolic’

The MSCI China Financials index surged 18 percent in two days after the official Xinhua News Agency said on Sept. 18, 2008, that Huijin would buy shares. The gauge erased those gains in the pursuant five weeks, falling as much as 47 percent as the global financial crisis worsened.

“This move is symbolic,” Chanos said. “They’re just trying to send a message. That’s appropriate.”

China has led the recovery from the world economy’s worst recession since the 1940s, contributing more than 30 percent to global growth last year, after the central government ordered state-owned banks to increase lending and encouraged local governments to boost spending on infrastructure and housing. New loans in China since September 2008 totaled $3.8 trillion, while property prices have climbed about 60 percent since the end of 2006, according to the International Monetary Fund.

The decline in property sales volume last week, traditionally a peak period for Chinese developers, may mark a turning point for a property market that had defied the government’s recent efforts to contain surging home values, according to Credit Suisse Group AG.

Higher Rates

China’s central bank has raised its benchmark lending rate three times this year and lifted lenders’ reserve requirements six times. China’s banking regulator told lenders in July not to extend the maturity of loans to developers and not to grant new credit to help developers repay maturing debt.

Today’s rally helped the MSCI China Financials index pare its 2011 decline to 32 percent, more than the 29 percent slide in Europe’s Stoxx 600 Banks Index and the 22 percent drop in the Standard & Poor’s 500 Financials Index.

The China gauge is valued at 1.3 times net assets, according to data compiled by Bloomberg. Chanos, who bet on a decline in Enron Corp. shares before the company filed for bankruptcy in 2001, said in an interview last month that the stocks will fall below the value of their net assets.

Vale is building “a fleet that is larger than the U.S. Navy” to ship iron ore to China, Chanos said today at the GAIN/GMA conference in New York. Rio de Janeiro-based Vale’s preference shares have dropped 18 percent this year.

‘Wonderful Business’

“Vale is one of the more aggressive miners that has capital expenditure closely tied to China,” Chanos said in an interview at the conference, adding that he’s also betting against cement producers, without naming any specific companies.

While Chanos is short-selling Chinese banks, property developers and construction companies, he has kept holdings in casinos in the former Portuguese colony of Macau for 1 1/2 years, citing their growth and more credible financial figures.

“The Macau casinos have a wonderful business, it’s taking in money from Chinese businessmen elsewhere who send it through junky companies to casinos to gamble,” Chanos said in New York today. “The growth continues and they have basically western managers and western accounting, so we trust the numbers a little bit more.”

SJM Holdings Ltd. (880), Asia’s biggest casino operator, has risen 12 percent in Hong Kong trading this year and Wynn Macau Ltd. (1128), the region’s second-largest casino company by market value, has gained 23 percent.

In a short sale, an investor borrows a security and sells it, expecting to profit from a decline by repurchasing it later at a lower price.

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net