“‘I continue to believe thatthe Chinese economic model poses grave financial and geopolitical threats to the U.S. and itsinterests, more so today than ever before.’”
That line above came Tuesday from short seller Jim Chanos, as he reiterated his longstanding concerns about China’s economy to a U.S. House committee that held a hearing on Beijing’s threat to U.S. financial stability.
Chanos, who has been bearish on China for more than a decade, told the House Select Committee on the Chinese Communist Party in a prepared statement that the Asian nation’s economic model is “all about growing GDP at almost any cost,” with much of the investment in gross domestic product funded by debt. He offered warnings about “overbuilding” and “ghost cities,” adding that “China’s real estate market has developed serious cracks in its foundation.”
“One possible solution that would allow China to keep its investment-driven model intact would be to shift spending away from real estate and towards defense,” said the president of Chanos & Co., formerly known as Kynikos Associates.
“Of course, increased defense spending by China presents new questions on the security paradigm in the Pacific theater.”
From MarketWatch’s archives (2011): Chanos: China’s hard-landing has already begun
And from 2015: Why Jim Chanos thinks China could be the next Greece
Chanos had been scheduled to testify in person before the House committee in New York City, but the panel’s chairman, Republican Rep. Mike Gallagher of Wisconsin, said the investor’s flight was forced to turn around while over Pennsylvania due to bad weather, and he couldn’t find any other flights.
Gallagher urged everyone at the hearing to read the short seller’s prepared testimony, saying Chanos “didn’t pull any punches.” The Republican congressman also expressed his own worries about U.S. investments in China, saying Wall Street companies sometimes act like that country isn’t a threat at all.
“The truth is American pensions, endowments and retirement savings are not being protected. They’re being swindled,” Gallagher said in his opening statement at the hearing. “Fraud, fake accounting and outright lies are endemic in the communist system. Taking on a genocidal communist regime as a business partner is not a recipe for success. It is a recipe for systemic risk.”
Chanos noted that he has often been accused of not understanding
China and “portrayed as a pessimistic naysayer.”
“While short sellers like myself may never be popular among the chorus of bulls on Wall Street, we are often the ones wearing the white hats when it comes to identifying economic shortfalls and outright fraud,” he said.
In addition, he said that since 2010, the S&P 500 Total Return Index has outperformed a China stock ETF by a factor of eight on a relative basis, and on an absolute basis, the China ETF has nearly been cut in half while the S&P 500 Total Return index has more than quintupled.