It looks like China is going to be able to avoid the dreaded “hard landing“, but according to Jim Chanos, that is not necessarily a good thing. Hedge fund short king Chanos says that China’s ongoing economic slowdown is starting to look more and more like the pattern we saw with Japan, a major boom in the 1980s followed by more than a decade of economic stagnation.
More on China from Jim Chanos
As part of a panel discussion earlier this week, Chanos said that it seems China may be on a path very much like the one that led to Japan’s lost decade in the 1990s as the debt level grew more twice as fast as its economy.
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“We have an economy addicted to credit,” Chanos, founder of hedge fund Kynikos Associates, noted while participating in a panel discussion on China in New York Tuesday. While the country doesn’t appear to be facing an “imminent collapse,” it is on a trajectory similar to the one Japan was on before its asset-price collapse in 1991 “but on steroids,” he noted.
He went on to point out that Chinese annual loan growth has slowed down to around 15% from over 30% in 2009, but even a 15% loan growth rate is more than double the growth in the gross domestic product. Total household and corporate debt was up to a worrisome 207% of GDP in June of this year, up from 125% at the end of 2008 when China began borrowing.
For comparison purposes, Japan’s total debt mushroomed to 176% of GDP in 1990, when it was a mere 127% a decade earlier in 1980. Japan has seen weak economic growth for more than 20 years now despite various efforts by the government to get the economy jumpstarted.
China, reported a 6.64% increase in GDP last month, a bit below the government’s target of 7 percent this year. Economists note that the Middle Kingdom has been growing at the slowest pace since 1990. Jim Chanos says that growth in nominal GDP is down to a mere 5% in China today, a huge decline from 15% in 2010, with the economy clearly deflating.
“It takes time to sort out” the debt overhang, Chanos commented. The short king hedge fund manager has been saying since February 2010 that China’s real estate market will melt down, and that “China is Dubai times a thousand” and on a “treadmill to hell” because it currently depends almost solely on real estate for economic growth.