Subject: James Chanos: More Pain to Come in China - WSJ
From: "Eric Schwerin" <[email-masked]>
To: "Hunter Biden" <[email-masked]>, "Joshua Alcorn" <[email-masked]>
Date: Tue, 28 Jul 2015 07:14:26 -0400

James Chanos: More Pain to Come in China - WSJ

http://www.wsj.com/articles/james-chanos-more-pain-to-come-in-china-1436464188

James Chanos: More Pain to Come in China
   ENLARGE

James Chanos  Photo: rick wilking/Reuters
   By
Gregory Zuckerman and
 Mia Lamar
 Updated July 9, 2015 7:37 p.m. ET

Even after Thursday’s gains in China, investors are licking their wounds
from a 28% plunge in shares since mid-June.

But the most notable bear on the Chinese market has a warning for bargain
hunters: More pain is ahead.

“The story has yet to play out,” says James Chanos, the short seller who
runs New York hedge fund Kynikos Associates. “As long as China adds credit
faster than its growth, the real story is months and years ahead.”

Mr. Chanos and fellow China bears are increasingly in the spotlight, not
only because of the potential profits they might claim but also because
they are now in the cross hairs of the Chinese government. On Thursday, a
report by the state-run Xinhua News Agency said Chinese police were
investigating “malicious short selling.”

Short sellers generally sell borrowed shares on the belief they can buy
them back at a much lower price, pocketing the difference. Critics of the
practice say it can fuel a market decline.

Many would-be bears say they have been wary of shorting Chinese
investments. Some say it has been challenging to establish sizable bearish
positions in China. Others worried about a fight with the Chinese
government or were concerned about taking a stance in a market that Chinese
leaders have been trying to aid.

One hedge-fund manager says he managed to do some shorting but watched in
frustration as hundreds of Chinese stocks were frozen from trading
Wednesday, making it impossible to tally his trading results or exit
bearish positions.

The Shanghai Composite gained nearly 6% on Thursday
<http://www.wsj.com/articles/asians-shares-lower-as-chinas-rout-grips-global-markets-1436405225>,
arresting the sharp fall from earlier in the week.

Mr. Chanos has been betting on a downturn in China for around five years, a
period when Chinese shares rose steadily along with many markets around the
world. Those conditions made it difficult for Mr. Chanos, and his firm’s
assets under management shrunk to around $3 billion, down from about $6
billion several years ago.

But Mr. Chanos, who famously first cast warnings about Enron Corp.,
maintains about 20% of his firm’s global funds in bearish Chinese
positions, he says. Those positions are making money, he says, though he
declined to elaborate.

Looking forward, Mr. Chanos argues that the inability of Chinese leaders to
stem the tumble in recent weeks will sow doubts about the government.

“I have no idea where equity markets will trade, but the Shanghai market is
not the best barometer” of the declining health of the country, he says.
The Chinese economy “has been on a five-year glide path downward” that he
expects will continue.

Investors have itched to profit from shorting China, where valuations of
mainland-listed stocks had soared to dizzying heights as major stock
benchmarks doubled within a year. Last month, famed bond investor Bill Gross
<http://topics.wsj.com/person/G/Bill-Gross/52> declared the smaller
Shenzhen market
<http://blogs.wsj.com/moneybeat/2015/06/04/bill-grosss-next-short-shenzhen/>the
potential “short of a lifetime,” in a tweet issued by his employer, Janus
Capital Group <http://quotes.wsj.com/JNS> Inc. <http://quotes.wsj.com/JNS>

A number of funds have made money from bearish Chinese positions, including
San Francisco-based Valiant Capital Partners, according to people familiar
with the matter. Valiant was founded by Christopher Hansen, an alumnus of
Julian Robertson’s Tiger Management Corp., who in 2013 lost out on a bid to
buy the Sacramento Kings basketball team. A spokeswoman for the firm
declined to comment.

But the winnings of most China bears aren’t nearly as great as the traders
wish, sparking some gnashing of teeth. And some bearish traders have been
nervous about a market that until recently had been furiously rallying. Mr.
Gross has said he hasn’t placed bearish trades on China for his fund,
despite his concerns.

Michael Hintze <http://topics.wsj.com/person/H/Michael-Hintze/5806> is
among those who wishes he had made more during the recent tumble. Mr.
Hintze, who runs $14 billion London-based hedge fund CQS LLP, anticipated
an economic slowdown in China, partly due to an anticorruption effort
<http://www.wsj.com/articles/china-anticorruption-campaign-targets-party-cliques-1425335633>
that figured to slow high-end spending.

Mr. Hintze didn’t place big bets against Chinese stocks, though, opting for
other wagers that he believed would profit on weakness in China. For
example, he bought credit default swaps, a derivative that provides
insurance against debt defaults, on the debt of mining and resource
companies and high-end luxury goods manufacturers.

But like most others, CQS’s bearish positions weren’t huge. The $3.4
billion fund Mr. Hintze runs was up 4.8% this year, through the end of
June, but is down a tad so far this month, according to investors.

Foreigners can short China-focused exchange-traded funds or derivatives
listed outside the country. But those that are easily traded limit
investors to a broad negative wager on big Chinese companies, not the
stock- or sector-specific bets that many managers favor.

Foreigners can also bet against mainland companies trading in Hong Kong
known as H-shares. But it remains difficult and expensive to short
mainland-listed stocks known as A-shares, part of the reason why many
global funds were slow to join the Chinese rally this year.

Mr. Chanos became bearish on China around the beginning of 2010, worried
about rising debt throughout the economy. Since then, his firm has shorted
H shares as well as companies at risk if the Chinese economy slumps, such
as iron-ore shares in Australia and gaming companies in Macau. He also bet
against Hong Kong property companies, banks, shipping, cement and coal
producers, and others with heavy exposure to China.

Mr. Chanos has avoided A-share Chinese companies, worried about actions by
the government to prop up those stocks.

He says his firm’s bearish Chinese positions have made money for the firm
since they were placed, despite the huge rally for Chinese shares in recent
years.

“We’ve sold things on rallies” and taken other steps to generate profits,
he says.

Mr. Chanos’s fortunes should continue to improve if the Chinese economy
continues to slow, something he expects over the long term. “The
omnipotence of the Communist party has taken a hit and that’s a real cost,”
he says.

*Write to *Gregory Zuckerman at [email-masked] and Mia Lamar at
[email-masked]

Eric D. Schwerin
[email-masked]

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