Evergrande’s crisis could be “far worse” for investors in China than a “Lehman-type situation” because it points to the end of the property-driven growth model in the world’s second-largest economy, short seller Jim Chanos said.
“There’s lots of Evergrandes out there in China — Evergrande just happens to be one of the biggest,” Chanos, best-known for predicting the collapse of energy group Enron, told the Financial Times. “But all the developers look like this. The whole Chinese property market is on stilts,” the founder of New York-based hedge fund Kynikos Associates said in an interview.
Concerns over the world’s most indebted developer have sparked drops in global markets this week as investors worry about the potential fallout as the group struggles to meet a debt payment on one of its international bonds due on Thursday. Such a default, some say, could cascade across the broader Asian corporate debt market.
The real estate company said a domestic payment due on Thursday had “already been resolved” but provided no indication of whether it would pay offshore investors, which include several major international asset managers.
Investors broadly agree that Evergrande’s unravelling will not hurt global banks and investors in the way Lehman Brothers’ failure did in the financial crisis, as its international debt load, at about $20bn, is relatively small.
But its total liabilities stand at more than $300bn, due largely to creditors and businesses in mainland China. Chanos is among those warning that the economic impact in the country from a wider series of non-payments could be severe. “In many ways you don’t have to worry that it’s a Lehman-type situation but in many others it’s far worse because it’s symptomatic of the whole economic model and the debt that’s behind the economic model,” the 63-year-old said.
Last year President Xi Jinping took steps to address years of chronic oversupply in Chinese property, and Beijing drafted new rules to constrain leverage in the sector, which directly and indirectly contributes 29 per cent of the country’s gross domestic product.
“If you try to deflate this bubble, it is fraught with risks,” said Chanos. “I don’t think they’re contagion risks. This is not a Lehman-type situation where there is contagion interbanks and intra-banks and everybody stops lending to everybody else. This is more a risk to the economic model because residential real estate is still such a huge part of GDP there.”
Chanos said the country would need to find “new growth drivers, or downshift somewhat semi-permanently into a lower level of growth”.
“Has the Chinese Communist party grappled with the implications of that? That remains to be seen,” he added.
Short-selling funds such as Kynikos have fallen from favour in the long upbeat run in markets since the financial crisis, which was punctured only briefly by the Covid-19 pandemic in 2020. Assets managed by Kynikos have shrunk below $1bn after peaking at about $7bn more than a decade ago.
China forms a growing part of Chanos’s strategy. Kynikos has doubled its exposure to China in its global short fund to more than 10 per cent over the past year, including adding small short positions in HSBC and Standard Chartered, “due to their heavy loan exposure to Greater China”. Both banks are listed in London but derive the bulk 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 answer to Starbucks, after rival short seller Carson Block of Muddy Waters encouraged him to look at it. The company was subsequently investigated for accounting fraud and Chanos closed out his short position at a profit following a big drop in its share price.
Chanos said he was also short casino group Wynn Resorts, which derives much of its cash flow from Macau, the world’s biggest gambling hub. “We think that the crackdown on Macau has just started,” he said. Last week, casino stocks suffered their worst day ever as authorities announced a review of gaming laws.