Jim Chanos Doesn’t Trust Accounting in China, Likes Financials [VIDEO]

Jim Chanos Doesn’t Trust Accounting in China, Likes Financials [VIDEO]
Jim Chanos photo via Insider Monkey (CC BY-ND 2.0)

Jim Chanos was on CNBC this morning. Below we have several videos with their intro line, followed by the computer transcript of the text for all of them.

Jim Chanos Doesn't Trust Accounting in China, Likes Financials [VIDEO]

“I wouldn’t trust any company’s accounts in China,” says James Chanos, Kynikos Associates president & founder, explaining why he is short Chinese companies, despite GDP growth.

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James Chanos, Kynikos Associates president & founder, explains why he is concerned about rising health care costs.

James Chanos, Kynikos Associates president & founder, explains why he is short some tech companies but long on banks.

James Chanos, Kynikos Associates president & founder, discusses whether high-frequency traders have an unfair advantage over the individual investor.

James Chanos, Kynikos Associates president & founder, shares his thoughts on why he would consider adding shorts to his European positions.

For video #1

our guest host is one of the world’s largest short sellers but he goes, you go long on certain
things. yes, we have a hedge fund. famed hedge fund manager jim chenos, founder of
kinikos associates. kinikos has greek origin and did it mean anything? well it’s the root of
the word cynic but i’m also half irish so it means you really shouldn’t listen to me at all when
it comes to finance. i’ve got some irish, too. let’s just leave it at that. cynical. we have to
start with china i think, and we’re still in a period where everybody can see that something’s
happening over there, but the consensus is, always has been and still is that it’s not,
nothing really that major, nothing really that big to worry about. if you noticed that, people
finally will concede yeah, okay, but they’re the same people that say china has got it down
pat, know exactly what they’re doing. is this the beginning of the day of reckoning? we get
criticized because china is not lying there in smoke and ruins. we’ve done just fine in china. i
think what we’re seeing is the model, the economic model everybody trumpeted three years
ago, when i first started talking about it here, is under a lot of scrutiny and there’s two
givens in the world financial markets that central banks will ease and china will stimulate and
it’s always around the corner. now, with qe infinity sort of upon us, we know that’s already,
that given is on the table in the west but in the east i’m just not so sure and china is
grappling with this issue and if you overlay that, some clearly new political things which of
course is not, we’re not political scientists but something’s different. the bo xilai thing — if
you pick up on upheavals and tumult, this is going our way, too. but unexpectedly but that is
an added layer of risk, you’ve seen the nationalism come out the spratly islands and the
disputed over the japanese/chinese islets. we’ve covered new positions — if you had to talk
about a net short position you’re not less than you were when you started? no, we’re about
the same, about 20% of our global short fund. staying where you are? yep. this is not,
though, the — i hate to channel jeremiah wright, this is not the chickens coming home to
roost yet, is it, in china? the status policies? people still believe in that, joe and you and i
joked about the fact these wonderful capitalists in the west seem to embrace this central
committee. i think we believe in central banks in the west, as i said before, and central
committee in china and i just don’t think either might — are there empty stadiums, empty
apartment buildings? have they overbuilt? doesn’t sooner or later the bad loans come —
there was a report this morning as i was driving in here that one of the western firms thinks
non-performing loans tripled in the first half from the end of 2011. i’ll know when more i go
back to the office sounds like a lot. it is a lot. gone to almost 500 billion yuan, which would
be $80 billion u.s., these are relatively small numbers in the u.s.27 billion in the u.s., and
that’s using chinese accounting which we could talk about, fill an hour worse. when europe
gets worse or better, that has a lot to do with china, too. european economies depend more
on china than they do the u.s. so the export-driven aspect of china is high, but so are the
imports, so we’ve cautioned people that china’s net exports is a very small part of their
economy, but gross exports is very large, it’s almost 40% of the economy. sort of 40%
exports, 37% imports for net three, but if the 40 drops to 35, you can have problems. the
other interesting thing that’s new in china is that we are beginning to see not the trade
export balance decrease, which has been happening, but now capital is going out of china.
so they’re actually seeing a deficit in terms of investment. well, hot money is leaving. that’s a
big change. it’s a huge, huge change and it’s going to make the policy much harder to
implement from beijing, in order to fix this problem, when money is not coming in, it’s going

out. would you have made more money if you had been a big short in europe three years
ago instead of china? probably not after the las eight weeks. there’s been an enormous
rally. were you active in europe at all if. we were in the banks and still are. you didn’t
overemphasizeo the china short? no, if you would look at our portfolio and say what’s really
sort of overweight, it would be china. can i just ask a little bit more about china? we had jim
cramer on yesterday, we get to talk to him every day toward the end of the show. we
mentioned you were coming on and he says that he completely respects you and your
work, but he disagrees a little bit with the idea that china is falling apart. i think some of the
things he pointed to were electricity numbers that came up. yep. a bunch of different —
maybe he can ask more pointedly but you hear the argument from other people, numbers
like electricity. the electricity power numbers were up 2.6% in august, which was still a bump
in the low numbers and that’s growth of 2.6, year over year. so i’m not clear what jim was
talking about because the power numbers have been weak. he had some others. the baltic
dry but that thing jumps all over the place but again it’s sort of interinterspective. china’s
growth is slowing quickly. that’s stated gdp. you’ll never see a negative gdp out of china for
a year, not under this regime but look at corporate profits, look at what’s happening on the
ground, corporate profits are imploding over there and again — you don’t even believe half
the profits are real. exactly, i have problems with that. this regime, you mean there’s only
one regime, isn’t it in. that’s what i’m saying. under this regime is the same one for the past
— they’re going to show you growth no matter what. it’s the permanent regime. take a look
at the chinese stock market. it’s gone nowhere despite having one of the highest rates of
growth of any emerging market or any market, gdp growth has been 9%, 10% for years and
you’ve made no money in the chinese stock market is there any way to divide the
companies that you believe in china have real accountants, real accounting and real
numbers and tse that don’t? you can put almost all of them on the side. they don’t have real
numbers. so there’s no companies in china — i wouldn’t trust any companies. even some of
the larger international conglomerates? state owned enterprises it was reported overnight
by state ministry. i’m not suggesting the bigger companies or better or worse than the
smaller companies but is there any model you would use to say these guys i buy this, the
other guys — as a western investor i would take issue with almost any of the corporate
accounting in china. only invest in the ones where you can look at the numbers in chinese
and tell whether they’re real or not. they go from right to left so they start with the number
they want and they end up with what needs to go into — don’t they? if you go from right to
left you can’t do that. i’m not in their culture which is 5,000 years old and that’s not what this
is about but indeed you look at the biggest of companies, state-owned enterprise, and they
don’t earn their profits in cash. the transactions with affiliates they don’t return on capital
enough of their cost of capital so any way you look at this, the share market in hong kong
where it’s at designed for short sellers, designed to suck western capital into the country
and never let it go back out and i keep pointing this out to people that you’re almost in a
classic emerging market roach motel except it’s a really big one, in that it is very difficult to
earn adequate returns of capital and get your capital back as a western investor in china. i
was kidding about the right to left. you called the entire company a roach motel. the eight
share market. oh, all right. let’s be clear, and i think that — you can’tven go to europe
because it’s too close to china, right? you saw the american ambassador’s car was attacked
the other day, what would they do to short sellers. i was chided sometimes even on the set
for not having been to china. who was that? i didn’t chide you. no, it went he you. it was
andrew, i remember. it was. kevin farria wants to know what you think about reports about
the commodity collateral not being found in the warehouses, things like cotton d copper.
there’s lots of reports now as there is this whole shadow banking system? china which
doesn’t get a lot of press and as people have found typical access to the big bank credit
reduced, they’ve gone into the shadow banking regional banking markets and there’s all
kinds of cross-guarantees that different companies make money by guaranteeing other’s
debts and it’s a mish more than of collateral problems and they’ve gone in many cases to
seize collateral for defaulting steel traders and found it’s not there. it was like the salad oil.
so this i think we’re going to hear more and more stories about this because at the end of
the day, and we’ve discussed it here, this is a credit boom and when people say china is
going to stimulate i say well they are stimulating. credit growth in 2012 will be north 30% of gdp all in, bank, bond issuance and the shadow banking and these are huge numbers. it’s
still driven all by debt. it’s amazing, you get righter and righter and yet the people get more
and more set in their denial, and it reminds me of the previous times you’ve been right. it
looks like you’re being right but the same people that argued at the start continue to argue.
there’s a lot of vested interest in this one. lot of people have, are counting on china, and i
think it’s just increasingly problematic.


does the fiscal cliff play into any of the things you look at when you look
at shorting? no. it really doesn’t. we were very active in the health care space a couple
years ago, we talked about that and that is our biggest concern, is just ongoing health care
costs, they’ve moderated a little bit recently, still growing 4.5, 5% a year. you can’t be short
companies. we’re not short, we’re long. we were short a lot of things in ’09. those are all
covered. we covered those and i think that, but the analyzing, it’s just these costs are really
big, they’re getting worse, and they are the entitlement problem we’re facing, it’s health care
and something’s got to be done with it. and it hasn’t been tackled. the attempt and the
problem in getting a deal done, a lot of what i think needed to be done again from my
personal perspective was cost containment, instead we made it more inclusive and we cut
back on the cost containment to get a deal done and i think that was a lost opportunity. will
an obama administration gets back in, try to get back to that? i don’t know. i know you’re a
democrat. when you look at the paul ryan plan, for example, does that make sense to you?
in terms of — on the health care side? no, because our analysis is that health care is not a
true — couple of reasons, when you’re sick you don’t shop around, you go to a trusted
provider by and large. number two, we already have socialized medicine, we just don’t have
the upside of socialized medicine in terms of cost containment. the federal government pays
almost 60 cents of the dollar and most of it fee-for-service so you’ve got this sort of
unended ability of people to charge or do more tests or whatever and then through all of
the talk about death panels, the numbers are what they are, and a big part of what we
spend is on the last year of life, and trying to find some solution, maybe end of care policy,
that is you pay for yourself, and basic major medical and all of the other things are covered
through medicare, whatever, i don’t know, but something’s got to be done, our costs are
twice the rest of the industrialized world. i’m gratified we got chanos to say something that
you pay for yourself instead of the government — at least we’re making some progress with
you, that there could be some individual responsibility somewhere. and the numbers are
what they are. incremental and we’re working with you, when the camera goes — you agree
it’s not a true free market either. is anything really? what i’ve come to agree with you on is
crony capitalism is worse than welfare. i think they’re both bad. they’re both bad? both bad.
that’s the problem it’s not a real free market for a lot of structural reasons, there’s one other
interesting thing to compare to us other countries. we’re subsidizing the rest of the world,
that’s another important point. right. but our reimbursement prices basically we allow the
pharmaceutical companies, we’re paying for it all. and the taxpayers of the rest of the oecd
are getting a good deal based on us. and that’s something that i think both parties could
probably agree on, that needs redressing. but we still got — i’m excited about the next ten
years, too, because all that basic science research that’s been so hard to take to the
bedside is coming soon and it’s going to be unbelievable. of course we’re living longer and
having more health problems. but i think that’s right.


what is working for the world’s biggest short seller? jim chanos will tell us what he’s long on
right now, and also want to talk perhaps more importantly still about what you’re short on
because that’s also working for you in a big way and technology is something you’ve been
short in a big way including hewlett-packard, talking about meg whitman earlier in the
broadcast. we have some longs offsetting those as well in our hedge fund. we’ve been
talking about the concept of global value traps for the last better part of a year, which is
areas where investors continue to hope that basically a broken business plan will somehow
be righted by the fact the stock is cheap. these have not been working for most investors.
they’ve been great shorts and one area that we think is just going to continue to stay under
pressure, investors should voice the whole pc chain, and apple as well as the cloud are
changing fundamentally the way we gather data. would you be long apple? we’re not long
apple. interestingly we’re long microsoft and oracle against our huelet short and i think that
there’s a variety of reasons for that. explain that hedge, if you ct a hedge. we do consider it
a hedge. you want to be sure the actual pc hardware you want to be short printers, you
want to be short ink. how do you think of oracle in that hedge. again, data base and a
market leading position. i don’t know that i would be long oracle on the long side but again,
as a hedge versus some of our shorts. oracle and microsoft are the two? the two bigger
ones we’ve gone public on and i’m cautious, looking at any hedge fund 13fs, you don’t see
the other side of the book and it’s scary to invest to say — when you see us go on
television, the second those 13fs come out — if it’s a hedge fund be careful. say you or
david einhorn or dan loeb or steve cohen, do you look through those and say oh, that’s
interesting? if it overlaps with one of my longs or shorts my trade des lk desk will flag it to
me but it could be misleading. do you think there should be additional disclosure? that
came out and the problem is once you put all of your positionsn the book everybody can
replicate your portfolio so there’s the whole issue — what would be the benefit of showing
the longs but not the shorts? i don’t. i don’t know why the longs should be shown. i don’t
think either should be shown. they should be shown to the authorities or sec as needed but
not to the public, in that if somebody is paying for that service, in effect you’re giving it away
for free every quarter. let’s talk banks. you’ve been long some banks. and short some
banks. we believe in the concept of the he will leveraging credit python if you will and if you
think about the three little pigs in the python, the u.s. is the pig at the end of the credit
python, europe is the pig in the middle of the python and our friends in china are the pig
going into the python and i think you want to — that’s a rea bad vision you just made. sorry,
becky. in any case i think the u.s. is coming out of this. give us apl coue names. we’re long
jpmorgan, we’re long citi actually. you have been long bank of america? no. it’s been on
quite a run. but jp and citi have been on a run. how much more do they have to go? we’ve
been short some of the spanish banks and chinese banks so it’s a relative, you know,
coming out of it — is that a hedge in your mind or just — that’s a hedge. that’s a hedge. any
other longs? nothing we’re jumping up and down on. things have gotten expensive quickly.
why not bank of america? again, we just made some relative judgments and we didn’t want
to be long a portfolio of five banks, and i think that citi and jpmorgan versus what we’re
trying to do in europe and china for investments. you talk about s of the bigger banks and
sort of the supermarket banks, i’m curious where you stand on a morgan stanley or
goldman sachs, that model, what do you think happens to that model? i don’t know. we do business and so we see them in a slightly different perspective see them from a credit
perspective and don’t see any problems with any of the prime brokers right now. i think that
model is a tough model, and you keep losing their best people, they start at their own
shops, it’s a tough model, not as easy as it was 10, 15, 20 years ago but the stocks are
down quite a bit. jim chanos will be sticking around. thank you for telling us some of the
longs and shorts, what we’re calling what’s working so that’s what’s working for you.


let’s get more from our guest host today, jim chanos, founder and president of kynikos
associates. jim, we’ve been talking about high frequency trading today, whether or not
these guys have an unfair advantage and there are different blocks you can put them into,
whether they’re paying to get ahead of the line at the exchanges, whether or not you can
use your own algorithm is probably another. since that conversation in the last hour, i’ve
heard from someone who is a big value investor who says he believes high frequency
trading front running cost his clients a few extra cents a share to get into big trades. do you
think that’s likely, do you think that plays out that way? i don’t know if he’s talking about the
rebate issue that we talked about off camera earlier or not. i don’t know exactly what he’s
saying. if you are a limit trader, you know, if i want to sell something short of $100 a share
and i get my trade in order, sell it short at $100 a share, he’s not shorting it at $99.97. so
i’m not quite sure what it’s referring to, if that’s the way you trade. that’s the way we trade.
we don’t turn our portfolio over very much. once a year, that’s glacial by hedge fund
standards so this world is somewhat alien to us. it also brings up the idea though that
greater volatility, that that is something that investors consider greater risk, and as a result,
it costs more to raise money for businesses. there’s not as much liquidity. if you’re in the
mutual fund business that would have an impact because you have retail investors, we
have institutional investors so it depends on your perspective on these things. going back
we get lost in the weeds. the issue is the fairness issue. everybody could agree. you
probably can’t stuff the genie back in the bottle and get rid of high frequency trading all
together. technology and trading goes hand in hand. there’s always somebody looking for a
better mouse trap. as long as it’s disclosure and fair and if i have a better mouse trap i
should be able to make more money. i think everybody is fine with that. , that ctain investors
have more than the retail guy? if it’s order flow, is that inside information, i don’t know. i’m
analyzing financial statements better than you, that’s the marketplace. that depends on
what the information is and how valuable is it and talking about he has an advantage on me
for a nanosecond or for whatever to get a half a penny. the average investor shouldn’t
worry about that. the average investor. your viewers should not be worry being that. the
issue gets back to fairness and externalities that raises and that’s something we really need
to be vigilant about completely. let’s shift gears a little bit. you talked at the top of the show
when you joined us at 7:00 how you think central committee is referring to china and central
banks, kind of go hand in hand and aren’t going to be able to control this. we haven’t dug
into what you think about qe3. i don’t want to disclose, i sit on a fed advisory committee so
these are my opinions. i’m concerned as a lot of people are that the fed is taking away
market signals. by keeping rates artificially low for long periods of time we’re distorting the
marketplace and one of the things the marketplace is good for is sending us signals that
something’s wrong, disfal cliff — what about the dislocation, what about the bubbles that
result from — absolutely. there’s no signals, then you don’t know — to open-end anything
don’t you run the risk now, maybe admittedly small but it’s there, what do you do when this
doesn’t work? we’re doing qe3 or qe infinity because one and two didn’t do their job and at
what point do you erode the credibility of the institutions by increasing your mandate? and
those would be the things i would worry about. but isn’t it relative, if everybody is printing
money, japan, europe and we are printing money, when you talk about eroding the
reputation or the credibility of an institution, it’s all relative, right? yes. it means it will be a
global collapse instead of a domestic collapse. and we’ll all own gold and a shotgun. do you
own gold? i don’t. do you own a shotgun. no. that will get you the gold. have you been
chased by someone with a shotgun? these are issues that i think really are — jim, kynikos
really, its, cynical sounds like kynikos, you know why? that’s where it came from. yes, but
the cynics were — i read about you and i wouldn’t want this to be, contemptously distrustful
of human nature and motives. you like to watch the world burn. i was right about that. no,
no. the cynics were seen as essential in the greek democracy to basically cutting through
the bull of the time, if you will. bacteria that decomposed — bacteria? i don’t know where
you’re going with this okay. they’re essential to keep everyone alive. getting back to qe3,
we’re in uncharted territory, and you know, who knows. and the exit we four it was a fourletter word, exit. we have to take bernanke’s word for it he can do this gracefully. i don’t
know if he knows he can. exit what? all of this balances, can he pull back in all of this
extraordinary — doesn’t that present its own issue for the markets? i thought we went from
the volcker era to the g. william mera. it’s clearly unprecedented. you love it because it will
mean more doom and destruction. i want to get my steak dinner paid back. from liesman. i
promised him you wouldn’t bring that up. where is he? he’s hiding on me. we’ll talk to
another person


. we’ll get final thoughts from our
guests. let’s get some final thoughts from our guest host, jim chanos. you’re up. would you
be lightning up on your shorts or starting to think about getting long? in terms of the
banking system, i think we probably would be more interested in the more short than less
short given the rally. though they have had a huge, huge rally, the european banks. and i
don’t think structurally — ready to get back in — and head to the shorts. there’s a bunch of
interesting ideas in the u.s. nothing long yet in europe? not much. not much. how long are
we going to be — it’s been how long already? over two years. yeah. but, again, keep in mind
there’s been a monstrous rally off the bottom here. stocks have, in some cases, when the
rally started, the day drag, remember? they did. right here on squawk. you did call it. that
was calling it. thanks. always a pleasure. that does it for us today

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