Wine Country ConferenceApril 5, 2013James ChanosKynikos AssociatesChina: The Edifice Complex
2The China Way• What we have learned– Guanxi is a way of life– Caveat emptor in acquisitions– Beware reverse merger listin...
3“The Number” Is Paramount• GDP drives economic activity, notvice versa• Countervailing priorities– Set centrally and loca...
4The Law Of Diminishing Returns• Unprecedented fixed assetinvestment boom• Gross fixed capital formationas a percent of GD...
5The ‘Shā Chén Bào’ Of Money is Wealth Destruction• Large-scale capital projects growsillier by the day– New South China M...
6• Bank lending remains high– 2012 saw a YoY increase in new banklending by 10% to RMB 8.2T– 2013 new lending forecasted t...
7Wealth Management Products are the Democratization of Credit• The triumvirate of shadow banking– Local Government Financi...
8Urbanization: Last Refuge of the Bulls• Goal of 80-85% urbanizationrate– Bulls look to 600 million peoplemigrating– Will ...
9Property is the Lynchpin• China’s current urban real estateboom– 2012 Total Real Estate UnderConstruction approximately10...
10Residential Real Estate Affordability?• Major Chinese cities versusNYC and London• Generational investment:Parental savi...
11Rising Wages: No Longer the Workshop of the World• Chinese wages are up– Private sector manufacturingpay up 20% in 2011 ...
12Wealth Gap: Straining the Harmonious Society• Popular resentment growing• Gini coefficient is “out of the lamp”– Not rel...
13Property Graft Is An Issue• Dirty money hides in property– Exposed officials have multipleproperties– Not concerned with...
14Faith in Government: Are People More Satisfied Today?• Leadership change was notseamless• Frustration with self interest...
15Shifting the Focus from the Real Problems• Cold war tactics inSenkaku/Diaoyu dispute• Staged demonstrations• Pressuring ...
16Chinese Proverb: “When the Tree Falls, the Monkeys Scatter”• Unprecedented fortunesamassed by leaders’ families• Buying ...
Don’t Take our Word for it• “GDP figures are ‘man-made’and therefore unreliable, Lisaid.”• “To some extent, this isfundame...
18Thank You tothe Wine Country Conference andthe Les Turner ALS Foundation
Important DisclosureTHIS DOCUMENT IS FOR PRELIMINARY INFORMATIONAL PURPOSES ONLY AND IS NOT AN OFFERING TO SELLINTERESTS I...
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Chanos china pres for wine country conference 5 april 2013

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Jim Chanos talks about China's unsustainable system on April 5th, 2013

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Chanos china pres for wine country conference 5 april 2013

  1. 1. Wine Country ConferenceApril 5, 2013James ChanosKynikos AssociatesChina: The Edifice Complex
  2. 2. 2The China Way• What we have learned– Guanxi is a way of life– Caveat emptor in acquisitions– Beware reverse merger listings– “Audited” numbers?• What goes on in China Inc.– Gaming receivables– Questionable “Other Income”– Property on the side– Copper and steel financing• Foreign technology partnerships– “Absorb and digest”– “Re-innovate”– Undercut partnersSource: shutterstock
  3. 3. 3“The Number” Is Paramount• GDP drives economic activity, notvice versa• Countervailing priorities– Set centrally and locally– Stability for Central Government– Vehicle of ambition for local officials• Regional-to-national GDP gapcontinues to grow– Gap of RMB 5.8T in 2012 vs.RMB 2.6T in 2009– “Size of Guangdong’s economy”1• Capacity overinvestment (2008-2012CAGR)– Cement 12%– Steel 10%– Autos 18%“GDP: Killing the Hen to Get the Egg”Source: China Media ProjectSource: “GDP gap in China the size of Guangdong economy”, SouthChina Morning Post, February 5, 2013
  4. 4. 4The Law Of Diminishing Returns• Unprecedented fixed assetinvestment boom• Gross fixed capital formationas a percent of GDP inChina has increased frompreviously high levels overthe past decade• Law of diminishing returns• Asset depreciation liabilitiesSource: National Bureau of Statistics of ChinaGross Fixed Capital Formation/China GDP
  5. 5. 5The ‘Shā Chén Bào’ Of Money is Wealth Destruction• Large-scale capital projects growsillier by the day– New South China Mall – world’slargest and loneliest– New Ordos – empty city in InnerMongolia– Sky City One – world’s tallest buildingto be built in only 90 days• Massive infrastructure spendingcontinues– 1,188 new shopping malls by 2015– Airports: 14 opened in 2012 and 12to be constructed in 2013– Subways: 28 cities get approval tobuild or expand subways• Feasibility is secondary thought– Overstate revenue and understatemaintenance costs– Is economic depreciation beingfactored in?Source: Global TimesHard To Keep Up
  6. 6. 6• Bank lending remains high– 2012 saw a YoY increase in new banklending by 10% to RMB 8.2T– 2013 new lending forecasted to growyet again• Banks poorly capitalized for potentiallosses• Rapid growth in shadow bankingspurring total social financing– Greater portion of social financing beingdone outside banking system– Increasing difficulty of controllingliquidity within the system• Chinese culture of credit– The myth: China has no history ofcredit-fueled booms and busts– Reality: History proves otherwise– Over 40% of banks loans went sourpost-1990s boomSource: PBOCPervasive Growth Of Credit Driving Boom
  7. 7. 7Wealth Management Products are the Democratization of Credit• The triumvirate of shadow banking– Local Government FinancingVehicles– Trust Products– Wealth Management Products• Wealth Management Products– 66% growth rate in 2012– Substitute for deposits on or hidingassets off balance sheet– Dubious investments– Investors expect both yield andprotection• First cracks appearing– Huaxia Bank– CITIC Trust: Recent questions onviability of three trusts• Warning from bank regulatorsSource: CBRC, BoA Merrill Lynch, Barclays, Kynikos Associatesestimates
  8. 8. 8Urbanization: Last Refuge of the Bulls• Goal of 80-85% urbanizationrate– Bulls look to 600 million peoplemigrating– Will be lower based on 250million floating population andsome farmers– Cities change boundaries anddefinition• Leads consumption economy– Urban dwellers consume more– Increased demand for socialservices• Is urbanization national?– New theory migration will betowards the Eastern coast insidethe high speed rail network– Go West policy in doubtSource: China Daily
  9. 9. 9Property is the Lynchpin• China’s current urban real estateboom– 2012 Total Real Estate UnderConstruction approximately10.6B sqm vs. 5.7B sqm in 2009– 2012 Total Real Estate per capita:14.9 sqm– 2012 Total Real Estate sqm per US$1M GDP dollars : 1,283 sqm/US$1M• Oversupply is an overlooked issue• Property management fees arerarely paid• Lack of affordability remains an issue• No one can identify the buyers• Commercial real estate is the futureissueSource: CRI English
  10. 10. 10Residential Real Estate Affordability?• Major Chinese cities versusNYC and London• Generational investment:Parental savings fundingpurchase of real estate by nextgeneration• Speculative fever providesbreeding ground for corruption• Mass market buyers priced outResidential Affordability ComparisonSource: Soufun (China), National Bureau of Statistics of China, USCensus Bureau, The City of New York, The Land Registry (UK),Greater London Authority (UK). China real estate values as ofDecember 2012, NYC 07-11 Average, Greater London Nov 2012Beijing28.1 yrs.Shanghai20.9 yrs.Chongqing14.5 yrs. Wuhan12.9 yrs. London10.8 yrs. NYC10.0 yrs.051015202530Years to pay off Apartment (Apartment price / Household Income)
  11. 11. 11Rising Wages: No Longer the Workshop of the World• Chinese wages are up– Private sector manufacturingpay up 20% in 2011 and 16% in2010– Minimum wages continue to rise13% through 2015• Margins are thin, profits down– SOE profits down 11.4% firstnine months 2012– SOEs under local governmentsprofit decline 20.4%• Regular protests for back wages• Chinese unit costs to the US notas cheap as they were• Factories offshoring from ChinaSource: The Epoch Times“Evil Factory! Return My Annual Bonus”Source: “Chinese SOE Profits down 11.4% in the first nine months”,Gov.cn
  12. 12. 12Wealth Gap: Straining the Harmonious Society• Popular resentment growing• Gini coefficient is “out of the lamp”– Not released for ten years– January 2013 official release:0.474 in 2012 with peak 0.491 in2008– Academic study estimates 0.61 for20101• The New Government plan– Raise low incomes and “adjustover high incomes”2– Details vague with watered downproposals and loopholes• Corruption crackdown?– New regime vows to crack downon corruption– Recent restriction to propertyownership informationSource: China DailySources: 1) “More Findings from the China Household Finance Survey”,Li Gan, Texas A&M University, January 20132) “China approves income distribution strategy”, Reuters, February 5,2013
  13. 13. 13Property Graft Is An Issue• Dirty money hides in property– Exposed officials have multipleproperties– Not concerned with liquidity ormobility• “Home Purchase Restrictions areonly for the ones not smart”• Fake Hukous can be bought forRMB 30,000 to RMB 50,000• Foreign passports advantageous• High profile catches– Newspapers carry rogues galleriesof corrupt officials– “Grandpa of Property” -Guangdong Policeman with 192properties– “House Sister”- 41 propertiesSource: China DailySource: “Hukou forgery scandals highlight police corruption”, Xinhua,January 24, 2013Official sacked over property scandal
  14. 14. 14Faith in Government: Are People More Satisfied Today?• Leadership change was notseamless• Frustration with self interest– New anti-corruption policy– Netizens are the Fourth Estate• Quality of life– Pollution blots out the sun– Food and baby milk scandals– Cancer villages• Demonstrations are a way of life– 2010: mass incidents estimatedbetween 180,000 to 230,0001– Environmental protests– Selected local strikes• More spent on internal securitythan the military2• Will there be real reform?Source: China Media Project"This is us [China] today!”Sources: 1) “Social Unrest in China”, Europe China Research and AdviceNetwork, 20122) “Chinas defense budget outweighed by internal security”, Want ChinaTimes, March 11, 2013
  15. 15. 15Shifting the Focus from the Real Problems• Cold war tactics inSenkaku/Diaoyu dispute• Staged demonstrations• Pressuring neighbors– New Chinese official mapincludes disputed islands– Hainan Province announcespolicy to board and searchvessels• Reaction to foreign press– Newspaper hacking– Reporting equipment stolen fromhotels– Visas revoked• Attempts at intimidationSource: Global Times
  16. 16. 16Chinese Proverb: “When the Tree Falls, the Monkeys Scatter”• Unprecedented fortunesamassed by leaders’ families• Buying foreign property andcitizenship• Getting the money out– $2.7T cumulative outflowsfrom 2001 through 2010– 2010 estimate of $420Balmost 3x 2001 estimate• “Playing” in Macau– VIP Baccarat is the channel– Estimated in 2012 at $18BSource: China Media ProjectSource: Global Financial Integrity “Illicit Financial Flows from DevelopingCountries: 2001 – 2010”Tunneling Out of China
  17. 17. Don’t Take our Word for it• “GDP figures are ‘man-made’and therefore unreliable, Lisaid.”• “To some extent, this isfundamentally a Ponzischeme.”• “The bubble must becontrolled, or both the realestate market and domesticeconomy will be jeopardized”• "The government hasalready been considereduntrustworthy, let alonebusinesses…"Xiao Gang, Chairman Bank of China“Regulating shadow banking”China Daily, October 10, 201217Li Keqiang, 1st Vice Premier ChinaUS Embassy Cable March 15, 2007Wikileaks – December 4, 2010Wang Shi, Chairman China Vanke“Vanke boss sees bubble in spike”Standard , January 29, 2013Chinese Netizen“Chinese companies trusted in China, says USreport; Nope,Say netizens”Want China Times, February 6, 2013
  18. 18. 18Thank You tothe Wine Country Conference andthe Les Turner ALS Foundation
  19. 19. Important DisclosureTHIS DOCUMENT IS FOR PRELIMINARY INFORMATIONAL PURPOSES ONLY AND IS NOT AN OFFERING TO SELLINTERESTS IN THE STRATEGIES. AN OFFERING CAN ONLY BE MADE BY DELIVERY OF THE OFFERINGMEMORANDUM AND ASSOCIATED DOCUMENTS FROM THE PROPER STRATEGY TO QUALIFIED INVESTORS.NEVERTHELESS, YOU ARE NOT TO RELY SOLELY UPON THE DATA HEREIN TO MAKE AN INVESTMENT DECISION.QUALIFIED INVESTORS SHOULD CAREFULLY REVIEW THE RESPECTIVE OFFERING MEMORANDUM FOR ACOMPLETE DESCRIPTION OF THE POTENTIAL MERITS AND RISKS INVOLVED.PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.NO OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY WILL BE MADE IN ANY JURISDICTION IN WHICH SUCHOFFER SOLICITATION WOULD BE UNLAWFUL.THIS DOCUMENT HAS BEEN PROVIDED FOR INFORMATIONAL AND ILLUSTRATION PURPOSES, IS FURNISHED ON ACONFIDENTIAL BASIS, IS INTENDED ONLY FOR THE USE OF THE AUTHORIZED RECIPIENT AND MAY NOT BEDISTRIBUTED TO ANY OTHER PERSON WITHOUT THE PRIOR WRITTEN CONSENT OF KYNIKOS ASSOCIATES LP.CERTAIN INFORMATION PROVIDED HEREIN IS OBTAINED FROM SOURCES, INCLUDING PUBLICLY AND PRIVATELYAVAILABLE INFORMATION, THAT KYNIKOS ASSOCIATES LP CONSIDERS TO BE RELIABLE; HOWEVER, KYNIKOSASSOCIATES LP CANNOT GUARANTEE AND MAKES NO REPRESENTATION AS TO THE ACCURACY OF SUCHINFORMATION. INFORMATION PROVIDED IS AS OF THE DATE(S) INDICATED AND IS SUBJECT TO CHANGE.THIS DOCUMENT AND THE INFORMATION CONTAINED HEREIN ARE PROPRIETARY INFORMATION OF KYNIKOSASSOCIATES LP AND MAY NOT BE REPRODUCED OR OTHERWISE DISSEMINATED IN WHOLE OR IN PART WITHOUTTHE PRIOR WRITTEN CONSENT OF KYNIKOS ASSOCIATES LP.CONFIDENTIAL – DO NOT COPY OR DISTRIBUTE© KYNIKOS ASSOCIATES LP – ALL RIGHTS RESERVED.

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