Jim Chanos Has More on the Coming Chinapocalypse
Far more interesting than Bloomberg’s clumsy attempt at evenhanded journalism in the last post is Jim Chanos’s interview on Bloomberg Market News. Some money quotes (pardon the obvious pun):
In fact, after the two last crises, in ’99 and ’04, when nonperforming loans went crazy in China without even a recession, the Chinese banking system was not recapitalized like ours was. It was papered over. So going into this credit expansion, Chinese banks are banks are sitting on lots of bonds from these so-called “asset management companies,” and they’re keeping them on their books at par…
Again, this sounds eerily familiar to the sort of mess the United States got themselves into by ignoring real values of housing property in favor of the par value of securitized property loans. One little dip in value of the underlying asset, and the whole house of cards tumbles.
Of course, more recently, we are finding the same thing going on in Europe. Because the European prudential banking regulators assigned essentially a zero risk to sovereign debt (allowing for essentially zero reserves to cover it), banks are now finding that these assets that they loaded up on are weighted far more heavily that their real-life risk would have dictated.
This is nothing new. I have been arguing for quite some time that banking regulations, in particular prudential capital regulations, set people up to fail. Rather than preparing for the next black swan, regulators create it by using a backward-looking measure of risk. Everyone piles into the debt that regulators have blessed as “safe,” and when it eventually does go down, it goes down hard.
Chanos continues talking about the lack of recapitalization in Chinese banks:
In the case of Agricultural Bank of China, which we’re short, those restructuring receivables, if you look on the balance sheet, are equal to over 100% of their tangible book. The Chinese banking system is built on quicksand.
I have been arguing for some time as well that the Chinese banking system is simply written on paper. That paper will be passed around as long as people believe that there is something backing it. Once word gets round that there isn’t, you had better hope that you aren’t the one left holding the paper.
Of course, this is what happens, ultimately, when money is not an asset, or even based on an asset. Money that is worth what the government says it is worth will soon be worth nothing.
Unfortunately, I believe there will be many U.S. investors caught holding the bag here. And when this happens, it will make MF Global look like pattycake.
This is an object lesson in what happens when investments are built on artificially cheap credit and not the stock of savings. While Jon Corzine has inanely admitted that “I don’t know where the money went,” the better question – for both MF and China – would be, where did the money come from?