Jim Chanos headshotJim Chanos famed short-seller, is the CEO of hedge fund Kynikos Associates.

Below is a recent interview (video and transcript) on currency wars, trade disputes and China.

(Presenter)
If there is a global currency war who wins? Because the comments from President Hu were a little stronger than I expected when it comes to the place of the dollar and the yuan in the system.

(Jim Chanos)
Nobody wins in a beggar thy neighbour race to the bottom [Amazing]. That we know from the 1920s and 1930s. That simply doesn’t work. Almost any economist worth his salt will tell you it adds costs to the system. Free trade is the cheapest of all [!]. But politics intercedes in these things.

(Presenter)
We’ve heard that President Hu will not bow down to pressure. But most economists I’ve talked to do expect the Chinese to let their currency float a bit more, and it has over the past year when it’s rise by what, three-and-a-half per cent.

(Jim Chanos)
Again we’re getting back to that currency thing. It’s like the tail wagging the dog. For instance I don’t think the Yuan is tremendously undervalued; in fact I think it might be overvalued [Incredible insight!]. The whole world thinks it’s undervalued and everybody is positioned for it to be undervalued.

(Presenter)
So of course you’re going to take the other side of that coin!

(Jim Chanos)
Everybody is positioned one way on one side of the boat. You might want to explore the other side.

(Presenter)
What makes you think it is overvalued?

(Jim Chanos)
Because of the credit problems in the system. RMB is going to have to be flooded into the system by the Chinese bank regulators to refloat the system [This is very important to understand]

(Presenter)
China and the United States need one another, clearly. We’re trading partners. We have a creditor — debtor relationship. Which is the first to flinch?

(Jim Chanos)
Well again….there are lots of different angles of relations. You’ve got trade relations, you’ve got financial currency relations, you’ve got geo-political issues. And you have a history of an ascendant economic power. They like to flex their muscles economically and otherwise to show they’re increasing growth and national pride. Certainly we’re seeing that in China. Now it is a symbiotic relationship [Amazing] and I think both sides will probably realize that. There are no real flashpoints, some pictures of airplanes notwithstanding. I think the real issues are going to be financial issues, they aren’t going to be trade issues [hard to believe — they need to earn their way to growth at least partly through exports] or geo-political. I think it’s due to the Chinese credit bubble bursting. I don’t think it is sustainable [Very interesting]