By MoneyMorning.com.au
One of the world’s biggest investors is worried.
In an interview with Bloomberg News, hedge fund guru, Jim Chanos said, “The Chinese banking system is built on quicksand.”
He’s just wound up a visit to Australia. And our bet is Australia’s biggest resources stocks have entered his short book based on his own observations of China’s economy.
But we’ll get to that later. First, here’s what our old pal Michael Pascoe told his poor readers just last week:
“…Beijing is not about to engineer a hard landing in its efforts to smack the luxury apartment investors…
“And in both the short and medium terms, the transition to greater focus on Chinese domestic demand gets yet more impetus. The rise and rise of the Asian consumer matters much more than the faltering of the Old World consumer.
“Which is all wonderful stuff for Australia as sustained Chinese growth means sustained Asian growth and therefore the fundamental underwriting of our economy remains in place even as the North Atlantic faces years of recession and/or stagnation.”
We think Jim Chanos had Pascoe in mind when he told Bloomberg News:
“Our concerns about what we saw in Australia: an economy clearly tied to China… In terms of the general complacency, what we heard over and over… is, ‘yes, yes, there are some excesses, but the government will figure a way out. That the government is this all-knowing, omniscient basic entity that will not prevent me from losing money.’”
And no sooner had Mr. Chanos left these shores than Reuters reported:
“China’s factory sector shrank the most in 32 months in November on signs of domestic economic weakness, a preliminary PMI [Purchasing Managers’ Index] survey showed, reviving worries that China may be slipping towards a hard landing and fuelling fears of a global recession.”
Stop.
No.
That’s not possible.
Because on Tuesday the “all-knowing” World Bank said:
“On balance, we believe that while there are issues (in China), they are being managed and the magnitude of those issues does not add up to something that would lead necessarily to a major slowdown as some have talked about.”
The World Bank says the Chinese economy will grow 9.1% this year, and “9 to 10 percent per annum… for the foreseeable future.”
As we’ve warned before, the world economy is linked. Greece borrows from Italy. Italy borrows from France. France borrows from Germany (and Germany tries to borrow, but is having trouble – check out the German bond sale for more)… But don’t forget: Greece, Italy, France and Germany buy from China… and China buys from… that’s right… Australia.
In short, what happens in Europe, matters in Asia.
This brings us back to Jim Chanos and the Chinese economy…
Look, we know Chanos is talking his own book. But given a choice between two views – Pascoe or Chanos – we know which makes sense and which is jingoistic cheerleading.
You can watch the Chanos interview here. So we won’t repeat everything he said.
The important thing is economies don’t grow non-stop forever – even China.
But how about China’s huge savings? Chanos has an answer:
“The Chinese banking system is built on quicksand, and that’s the one thing a lot of people don’t realize. When they talk about the foreign reserves of $3 trillion, what everybody forgets is there’s liabilities against that.”
That’s the key. Even if China’s growth slows to 8% from 9%, it doesn’t mean things will be fine. A 1% difference in growth is worth about $60 billion to the Chinese economy.
That can buy a lot of products, services, resources and loans. But if the money isn’t there it’s bad news. Especially for companies that invested expecting the $60 billion to be spent.
Think about it, it means China needs less iron ore… less copper… less concrete. It means fewer machines and workers (the Financial Times headlined this morning, “China labour unrest flares as orders fall”).
Look, we’ve said it before: China doesn’t have a miracle economy.
It has an economy where bureaucrats push buttons and pull levers… where the mainstream has mistaken a plain old credit boom for ingenuity and innovation.
And like all credit booms, this one will end in a bust.
It you want a clue of what that will look like, look at Europe and the U.S. Only for Australia, the China bust will have a much bigger impact.
Cheers.
Kris.
P.S. Don’t forget to check out Murray’s latest free stock market update over at his YouTube channel. As he told me this morning, “If people were doubting the gravity of the situation before, they should be convinced now that things are getting very scary.” Before you place another trade on the stock market, check out Murray’s stock market video update now…
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