Evergrande fallout could be worse than Lehman for China, warns Jim Chanos

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The Evergrande crisis could be “much worse” for investors in China than a “Lehman-type situation” because it marks the end of the model of growth immobilized in the world’s second largest economy, said short seller Jim Chanos.

“There’s a lot of Evergrande out there in China – Evergrande just happens to be one of the bigger ones,” Chanos told the Financial Times in an interview. “But all developers look like this. The entire Chinese real estate market is on stilts,” said the founder of New York-based hedge fund Kynikos Associates, known for predicting the collapse of energy group Enron.

Concerns over the world’s most indebted developer sparked declines in global markets this week as investors worried about the potential fallout as the group struggles to honor its debt payment on one of its international bonds due Thursday. Such a default, some argue, could spill over into the entire Asian corporate debt market.

The real estate company said a domestic payment due Thursday had “already been resolved” but provided no indication whether it would pay foreign investors, which include several large international asset managers.

Investors generally agree that the collapse of Evergrande will not hurt global banks and investors like the failure of Lehman Brothers during the financial crisis, as its international debt of around 20 billion dollars, is relatively small.

But its total liabilities stand at more than $ 300 billion, largely due to creditors and businesses in mainland China.

Chanos is among those who warn that the economic impact in the country of a wider spate of non-payments could be severe.

“In many ways you don’t have to worry about it being a Lehman-type situation but in many others it’s much worse because it’s symptomatic of the whole business model and the debt that’s going on. is behind the business model, “said the 63-year-old. noted.

Last year, President Xi Jinping took action to address years of chronic oversupply of Chinese real estate, and Beijing drafted new rules to limit leverage in the sector, which contributes directly and indirectly to 29% of the country’s gross domestic product.

“If you try to deflate this bubble, it’s fraught with risk,” Chanos said. “I don’t think it’s a risk of contagion. This is not a Lehman-style situation where there is interbank and intrabank contagion and where everyone stops lending to everyone. It is more of a risk for the economic model because residential real estate still represents a huge part of the GDP. ”

Chanos said the country would need to find “new engines of growth, or downgrade semi-permanently to a lower level of growth.”

“Has the Chinese Communist Party wrestled with the implications of this? That remains to be seen, ”he added.

Short-selling funds such as Kynikos have fallen out of favor in the markets’ long bullish period since the financial crisis, which was only briefly interrupted by the Covid-19 pandemic in 2020. Assets managed by Kynikos fell below $ 1 billion after peaking at around $ 7 billion more than a decade ago.

China is increasingly part of Chanos’ strategy. Kynikos has doubled its exposure to China in its global short fund to over 10% over the past year, including adding small short positions in HSBC and Standard Chartered, “due to their high exposure to loans to the Greater China ”. Both banks are listed in London but derive most of their profits from Asia. HSBC and StanChart declined to comment.

Last year, Chanos placed a bet against Luckin Coffee, once touted as China’s response to Starbucks, after short seller Carson Block of Muddy Waters encouraged him to watch it. The company was subsequently investigated for accounting fraud and Chanos closed its short position at a profit following a sharp drop in its share price.

Chanos said he was also short of Wynn Resorts casinos, which derives a large chunk of its cash flow from Macau, the world’s largest gaming hub. “We believe the crackdown on Macau has just started,” he said. Casino stocks had their worst day last week as authorities announced a review of gambling laws.

Additional reporting by Thomas Hale in Hong Kong