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Chinese Banks ‘Built on Quicksand’ With Bad Loans, Chanos Says

Kynikos Associates Founder James Chanos
Kynikos Associates Founder James Chanos. Photographer: Daniel Acker/Bloomberg

Chinese banks are “extremely fragile” because the lenders don’t have enough capital to offset bad loans, said Jim Chanos, president and founder of the $6 billion hedge fund Kynikos Associates Ltd.

Chinese lenders are saddled with non-performing loans accumulated in the late 1990s and early 2000s, Chanos, the short seller who predicted the collapse of Enron Corp. in 2001, said in an interview on Bloomberg Television yesterday. The banks are failing to recognize the losses on the bad loans and have carried out a lending binge since 2008, said Chanos.

“The Chinese banking system is built on quicksand and that’s the one thing a lot of people don’t realize,” said Chanos, who is shorting the shares of Agricultural Bank of China. “Everybody seems to think it is a free and clear open checkbook. It’s not. The banking system in China is extremely fragile.”

The MSCI China Financials Index of bank stocks has declined 32 percent this year on concern the quality of loans to local governments and the housing market will deteriorate as economic growth slows. State-run Central Huijin Investment Ltd., an arm of China’s sovereign wealth fund, said on Oct. 10 that it started buying stock in the four biggest Chinese lenders after their shares tumbled this year.

China spent 3.5 trillion yuan ($550 billion), equal to a fifth of its 2005 gross domestic product, bailing out and recapitalizing state-owned banks since 1998 as their lending to unprofitable state-owned businesses turned sour, according to an estimate by Moody’s Investors Service in 2007. Since September 2008, Chinese banks doled out $3.8 trillion in new loans to offset the impact of the global financial crisis, according to the International Monetary Fund.

Chanos said that he’ll keep his short positions until the government recapitalizes the banking system again.

In short selling, investors sell borrowed shares in anticipation that the securities will decline and they can buy them back at a profit.

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