Short-seller Chanos: Moody's, S&P wrong on China

NEW YORK Tue Dec 6, 2011 4:46pm EST

James Chanos, founder and managing partner of Kynikos Associates, speaks at the Reuters Investment Outlook Summit in New York, December 6, 2011.    REUTERS/Brendan McDermid

James Chanos, founder and managing partner of Kynikos Associates, speaks at the Reuters Investment Outlook Summit in New York, December 6, 2011.

Credit: Reuters/Brendan McDermid

NEW YORK (Reuters) - Hedge fund manager James Chanos, who has been a long-time skeptic on the Chinese growth story, is sticking with his gloomy view of ratings agencies Moody's Corp (MCO.N) and Standard and Poor's, saying their rosy outlook on China's debt only bolsters his bearish bet.

The famed short-seller said he's puzzled by the readiness of S&P, a division of McGraw-Hill Companies Inc MHP.N, to downgrade the sovereign debt of countries like the United States and much of Europe while continuing to give a nod of approval to China and its banks.

"The rating agencies are getting this one really wrong," Chanos, the founder and president of hedge fund Kynikos Associates, told the Reuters 2012 Investment Outlook Summit.

S&P earlier on Tuesday affirmed its long-term rating on China's sovereign debt at AA-minus, just one day after it threatened to downgrade 15 countries in the troubled euro zone, including that of Germany, Europe's biggest economy.

Moody's rates China at Aa3, with a positive outlook.

For at least a year now, Kynikos, with $6 billion under management, has been shorting shares of Moody's Investor Services and S&P parent McGraw-Hill.

Chanos, who specializes in making money when stocks fall in value, said China's housing bubble and opaque political and economic systems merit greater scrutiny and cynicism by the rating agencies.

He is shorting mining companies and construction companies that ship raw materials to China and is also betting against shares of some Chinese banks.

Short sellers make money by borrowing stocks in the hope that the price will decline, allowing them to buy the shares at a lower price and pocket the difference.

Chanos, who founded Kynikos in 1985 with $16 million, gained famed on Wall Street after his prescient call on accounting fraud at Enron a decade ago.

Since then, his most well-known target has been China, whose economy he says will eventually crash, driven by an unsustainable real estate bubble.

"It is already happening," Chanos said, citing what he said is a drop in new apartment sales across the country of about 40 percent year-on-year. "Everybody is admitting transaction volumes have plummeted. This is what we saw in places like Las Vegas and Florida before the crash; transactions just stopped."

"We are short anyone involved in the China real estate boom," he added.

Recently, Chanos has been focused on China's banks, which he says have made and continue to make billions in risky loans without sufficient capital.

Kynikos is short shares of the Agricultural Bank of China (601288.SS), the country's largest county lender.

OUTSIDE CHINA

The European banks have not escaped Chanos' glare, either. He has been short a number of European banks since the beginning of the year - before several nations enacted bans on short selling.

"The biggest commercial lenders in Europe are pretty much all in our portfolio," Chanos said, noting his skepticism that austerity measures will solve the debt crisis.

He has a more positive view, however, on the U.S. banking sector.

American banks "are not lending and their cost structures are still too high but that is not a death knell," Chanos said, although he is still noted caution. He is staying away from any U.S. banks with exposure to potentially vast mortgage write-downs. And while Kynikos is long Citigroup (C.N), Chanos emphasized that bet is a hedge against his short position on Chinese and European lenders.

The U.S. housing market isn't the only one that gives Chanos jitters. He recently visited Australia, where he was "stunned" at urban real estate prices. The housing market, in addition to the country's reliance on China to keep its economy afloat, is worrying, he said. Kynikos is short Australian miners.

"Australia has tied itself to the tiger's tail - I don't think that's a great place to be," Chanos said.

"But it is a lovely place to visit," he added. "I might go back for New Year's."

(Reporting by Katya Wachtel in New York, editing by Matthew Goldstein, Leslie Adler)