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“China is bound to go through a financial crisis sooner or later，” said James Chanos， President of Kynikos Associates， the largest investment company that is focused on short selling. The international capital market is brewing up a new round of short selling China’s economy.
It all began when Fitch Ratings downgraded China’s long-term local currency rating from AA- to A+， the first time that China’s sovereign credit rating has been cut by a major international agency since 1999.
Then， Moody’s Investors Service， despite maintaining an A3 rating， lowered its outlook for China’s government bond rating from positive to stable. Standard & Poor’s （SP）， though not downgrading China’s credit rating， claimed “China will have to pay for its economic stimulus policies.”
James Chanos， who has thought poorly of China’s economy， is engaged in stock short selling of China’s construction industry， including construction companies， real estate developers， and manufacturers of steel， iron ore and cement.
According to Hong Kong Exchanges and Clearing Limited， on April 17， the Capital Group unloaded 100-million-yuan （$16.22 million） H shares of Agricultural Bank of China for HK$342.2 million （$44.08 million） with the ratio of long position falling from 11.24 percent to 10.91 percent. JPMorgan Chase & Co. and Citigroup were also reported to have sold 42.36 million and 92.59 million H shares on April 12.
Some financial commentators believe， three points should be made in explaining the short selling of China’s economy by international capital. First， capital holders predict the prospects of China’s economy is not so promising. After a rebound in the fourth quarter of last year， China’s economic growth fell back to 7.7 percent from 7.9 percent in the first quarter of 2013， missing the expectation of 8 percent growth.
Second， China’s local debt risk has been on the minds of domestic and overseas investors. China’s local debt rose from 10.7 trillion yuan （$1.73 trillion） in 2010 to 12.85 trillion yuan （$2.08 trillion）， accounting for 25.1 percent of its GDP.
Last， shadow banking is another demon. According to Fitch， China’s total credit had equaled 198 percent of its GDP by the end of 2012， exceeding the 125 percent proportion back in 2008. From the perspective of financial stability， the expansion of non-banking credits breed risks.
While there is a possibility that big players in the international capital markets conspire to go bottom fishing through short selling， it should be recognized that China’s economy may be undermined by a potential financial crisis. If China’s economy continues to slow down， overcapacity triggered by a massive economic stimulus can water the seeds of financial risks.
For instance， severe overcapacity in the steel sector has led to heavy losses and difficulties in paying back loans and interest. Once these companies default on their bank loans， credit risks would come to light.
Debt risks derived from local financing platforms continue to expand. Fitch downgraded China’s long-term local currency rating because its local financing platforms had accumulated 12.85 trillion yuan （$2.08 trillion） of debt by the end of 2012， while former Finance Minister Xiang Huaicheng predicted the figure at 20 trillion yuan （$3.24 trillion）. Huatai Securities estimated that local government debt had reached 15.3 trillion yuan （$2.48 trillion） in 2012.
China should take the short selling as a kind reminder， rather than view it maliciously， and respond in a proactive way.
It all began when Fitch Ratings downgraded China’s long-term local currency rating from AA- to A+， the first time that China’s sovereign credit rating has been cut by a major international agency since 1999.
Then， Moody’s Investors Service， despite maintaining an A3 rating， lowered its outlook for China’s government bond rating from positive to stable. Standard & Poor’s （SP）， though not downgrading China’s credit rating， claimed “China will have to pay for its economic stimulus policies.”
James Chanos， who has thought poorly of China’s economy， is engaged in stock short selling of China’s construction industry， including construction companies， real estate developers， and manufacturers of steel， iron ore and cement.
According to Hong Kong Exchanges and Clearing Limited， on April 17， the Capital Group unloaded 100-million-yuan （$16.22 million） H shares of Agricultural Bank of China for HK$342.2 million （$44.08 million） with the ratio of long position falling from 11.24 percent to 10.91 percent. JPMorgan Chase & Co. and Citigroup were also reported to have sold 42.36 million and 92.59 million H shares on April 12.
Some financial commentators believe， three points should be made in explaining the short selling of China’s economy by international capital. First， capital holders predict the prospects of China’s economy is not so promising. After a rebound in the fourth quarter of last year， China’s economic growth fell back to 7.7 percent from 7.9 percent in the first quarter of 2013， missing the expectation of 8 percent growth.
Second， China’s local debt risk has been on the minds of domestic and overseas investors. China’s local debt rose from 10.7 trillion yuan （$1.73 trillion） in 2010 to 12.85 trillion yuan （$2.08 trillion）， accounting for 25.1 percent of its GDP.
Last， shadow banking is another demon. According to Fitch， China’s total credit had equaled 198 percent of its GDP by the end of 2012， exceeding the 125 percent proportion back in 2008. From the perspective of financial stability， the expansion of non-banking credits breed risks.
While there is a possibility that big players in the international capital markets conspire to go bottom fishing through short selling， it should be recognized that China’s economy may be undermined by a potential financial crisis. If China’s economy continues to slow down， overcapacity triggered by a massive economic stimulus can water the seeds of financial risks.
For instance， severe overcapacity in the steel sector has led to heavy losses and difficulties in paying back loans and interest. Once these companies default on their bank loans， credit risks would come to light.
Debt risks derived from local financing platforms continue to expand. Fitch downgraded China’s long-term local currency rating because its local financing platforms had accumulated 12.85 trillion yuan （$2.08 trillion） of debt by the end of 2012， while former Finance Minister Xiang Huaicheng predicted the figure at 20 trillion yuan （$3.24 trillion）. Huatai Securities estimated that local government debt had reached 15.3 trillion yuan （$2.48 trillion） in 2012.
China should take the short selling as a kind reminder， rather than view it maliciously， and respond in a proactive way.