Jim Chanos, the hedge-fund manager known for predicting Enron Corp.’s 2001 collapse, says he’d short sell Chinese companies listed in the U.S. if it were feasible to borrow shares to open the bearish positions.
The Bloomberg Chinese Reverse Mergers Index has plunged 41 percent since Nov. 8 amid speculation financial statements from companies such as China MediaExpress Holdings Inc. can’t be trusted. The concern intensified this week after Longtop Financial Technologies Ltd., whose initial public offering was underwritten by Goldman Sachs Group Inc. and Deutsche Bank AG, said its auditor quit because of false records.
“Almost all of them have odd looking financial statements,” Chanos, the president and founder of New York-based Kynikos Associates LP, said on Bloomberg Television yesterday. “We wish we could borrow almost all of them.”
The Securities and Exchange Commission began an investigation last year into the use of reverse takeovers, in which a closely held firm becomes public by purchasing a shell company that already trades. The cost to bet against the stocks is keeping Chanos away.
Renren Inc., a Beijing-based social-networking company that went public in the U.S. earlier this month, is among the most expensive U.S. equities to short. The stock is difficult to borrow with 72 percent of the lendable supply out on loan, according to Data Explorers, a New York-based research firm.
Short sellers have borrowed 96 percent of Beijing-based China Shen Zhou Mining & Resources Inc.’s lendable supply, meaning there is almost no equity available for short sellers to bet against. Its shares are also among the most expensive for short-sellers to borrow according to Data Explorers.
China MediaExpress, which began trading in the U.S. following a 2009 reverse takeover, has sunk 92 percent since Jan. 27. It’s being delisted from the Nasdaq Stock Market after auditor Deloitte Touche Tohmatsu said that it was “no longer able to rely on the representations of management.” China Shen Zhou has declined 59 percent since its Jan. 5 high after its chief financial officer resigned.
Longtop retreated 43 percent between April 4 and May 16, the last time it changed hands before trading was halted.
During yesterday’s interview, Chanos said investors concerned that U.S. technology stocks such as LinkedIn Corp. are overvalued should turn their attention to China.
The 53-year-old investor said his “dramatic” bet against Chinese real estate may not be sufficient. While LinkedIn, the first social-media company to go public in the U.S., traded as high as 31 times sales last week, overvaluation is more widespread in China, he said.
“The bubble is really on the other side of the world,” he said in New York. “What my team found, they actually came back saying we’re not bearish enough,” he said. “The signs of overcapacity were even much greater than their last visit, which was late last year, and increasingly the executives that they met with were sounding a little bit more uncomfortable about the current situation.”
Chanos said Chinese developers have too much land on their balance sheets, similar to the U.S. before its housing market tumbled. He has been forecasting a Chinese housing crash since last year. China’s economy expanded 10.3 percent in 2010 and the country has been aiming to curb climbing house prices.
“If you look at the balance sheets of the developers, you’d be hard-pressed to see how healthy they are because they’re all loaded up with land just as our developers were at the top of our market,” he said. “We’ve maintained our pretty much dramatic overweight in our Chinese shorts.”
China’s home prices rose in 67 of 70 cities monitored by the government last month. While housing prices slowed in major cities, they increased at a faster pace in smaller ones, according to data on the statistics bureau’s website. The Chinese government said this month it will maintain property curbs after it raised the minimum down payment for second-home purchases this year and introduced residential taxes in Shanghai and Chongqing.
China has lifted reserve-ratio requirements for major banks 11 times since January 2010 and raised interest rates four times since October to restrain increases in asset prices, including real estate.
Chanos said in March that a property bubble in China is “as big or bigger than what we saw in the West” when compared with the size of the economy.