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Jim Chanos: China’s “Leveraged Prosperity” Model Is Doomed…And That’s Not The Worst Of It

Jim Chanos: China’s "Leveraged Prosperity" Model Is Doomed…And That’s Not The Worst Of It

Authored by Lynn Parramore via The Institute for New Economic Thinking,

Famed short-seller is even more concerned with political fallout from Evergr

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Jim Chanos: China's "Leveraged Prosperity" Model Is Doomed...And That's Not The Worst Of It

Authored by Lynn Parramore via The Institute for New Economic Thinking,

Famed short-seller is even more concerned with political fallout from Evergrande than economic/financial woes.

Renowned short-seller Jim Chanos, founder of Kynikos Associates, is what you might call the “ever-bear” of China. For more than a decade, he has warned that the country was building a real estate-driven economy on a feeble house of cards. He spoke to the Institute for New Economic Thinking’s Lynn Parramore about how he views the chickens coming home to roost as the property giant Evergrande – now the world’s most indebted property developer — teeters on the verge of collapse.

Lynn Parramore: Back in ’09, when you started looking at China, your real estate analysts alerted you to the mind-boggling amount of real estate overdevelopment there. You warned that this overdevelopment would end badly. After Xi Jinping became president in 2013, you expressed the then-minority view that a different kind of leader had arrived on the scene. What’s your take on what has happened since then?

Jim Chanos: In 2013, we put a slide in our presentation for investors and talks that was very controversial – especially for Chinese nationals. It showed President Xi Jinping in emperor’s garb. People thought we should take it out, that it was offensive. At the time, Xi was widely seen as just the latest in a series of technocrats who had risen through the ranks — one who would follow along with Deng Xiaoping’s reforms. It’s “capitalism with Chinese characteristics.” It’s okay to get rich as long as the country prospers.

But a few things made us think, no, this guy is different. His first speech in China after becoming president was critical of the Soviet Union for being soft on perestroika. They should have crushed it when they had the chance, he said. Xi then set up an institute to study the Soviet Union’s collapse. That was a red flag to us that he was going to be more hardline than people thought. He went on to do an anti-corruption drive, which people dismissed as a typical settling of scores that Chinese leaders do. But it actually extended beyond that. A couple of years later, he began talking in Puritanical terms about social issues. Again, that was different. Nobody had cared about that stuff for 20 years. Do what you want as long as you don’t question the party. Next, we had the book collecting his speeches and writings, which people could be seen carrying around. He started showing up in military events dressed in Mao jackets. This symbolism isn’t lost in China.

We noticed all this, but the real switch occurred in 2019 when he started going after celebrities like Jack Ma [co-founder of Alibaba]. At that point, it was clear that this president was not stepping down at the end of 10 years. He was taking a much harder line on the “flowers of capitalism,” if you will, than past presidents. In 2021, all of this exploded into the open. There’s been initiative after initiative. Redistributing wealth to the masses. Going after other leaders. Overlaid on top of this is the Evergrande saga.

LP: Let’s talk about Evergrande, the Shenzhen developer whose crisis has got everybody worried. How did things get so bad?

JC: Last year, as the tech crackdown was gaining momentum, Xi’s administration put down a set of rules called the “three red lines.” They were sort of balance sheet financial tests. It was an attempt to deleverage the real estate developers.

LP: Which means he knew something was wrong.

JC: Well, here’s the problem. I always joke that when you have an investment-driven economic model, you know your annual GDP on January 1st of that year, because you can stick shovels in the ground to make your growth numbers. That’s how the model works. It’s not a consumption-based model. As we now know — and the Wall Street Journal just had some phenomenal numbers in a recent piece – that real estate construction is now larger than it was when he took office. I would always hear, well, don’t worry: these are smart guys, technocrats who see the problem and will wean themselves off this apartment construction-on-steroids. But they haven’t.

LP: Why haven’t they been able to slow it down?

JC: Since we started following China at the end of ’09, this is the fourth time that they’ve attempted to slow the real estate market down, because they do know that this is going to be basically too big to deal with if it keeps growing at the rate it’s growing. But every time they’ve done it, the economy has hit stall speed very quickly, and they panicked. They went from hitting the breaks to hitting the accelerator. That’s why we’ve seen higher levels of real estate. The idea that “I can’t lose buying apartments” became ingrained with bankers, real estate speculators, and the public.

LP: So with Evergrande, everyone came to expect a bailout?

JC: I think we’re at that crossroads. The problem is that these companies are so much bigger than they were in 2015 or 2011. Can you bail everybody out? In the case of the developers, you have an additional problem. The biggest amount of liabilities is not necessarily to banks and bondholders. It’s to apartment buyers. Here’s why: the Chinese real estate finance system is exactly the opposite of ours. In our system, when there’s a new development, you’re typically required to put 10% down to sign a contract, with the balance due on closing. You go get your financing and your mortgage proceeds pay for the rest of the house or the apartment. In China, you pay upfront. You are extending the developer a loan. So, of the $300 billion in liabilities Evergrande owes, I think the biggest chunk, last time I checked, is basically what we would call a deferred revenue item. It’s money that you took in from people, and you owe them an apartment. And the apartments aren’t done, but the money’s been spent. So the problem is not just bailing people out, but the question of who is going to put up more capital to pay off the retail people that have bought apartments that haven’t gotten anything.

These numbers are big, and Evergrande is not the only one. There are a handful of developers that are missing interest payments and have their bond prices reflecting distress.

LP: How much has corruption played a role in this mess?

JC: That’s a problem with their economic model focusing so much on real estate. Because they don’t have a local tax system, like property taxes, the local governments sell land to pay for local services. But whenever you have private developers buying land from municipalities controlled by one party, yeah, it’s ripe for corruption. We know that’s rampant in China.

LP: How do you view the policy reaction to Evergrande?

JC: So, what do the policymakers do? It’s not a Lehman moment in that there’s not a lot of cross-border interbank lending here. The Chinese system is still pretty much a closed financial system. That’s not the risk. During the Global Financial Crisis [GFC], what brought us to our knees was the liability side of the banks’ books. They couldn’t roll over the loans to each other because no one trusted the assets. Here, it’s the assets. I think that if they try to inflate it again, if they try to bail it out again, we’re only going to be right back in this soup in another two or three years, with even bigger problems.

LP: Is this only a problem with the real estate sector, or is it more extensive?

JC: Based on our analysis of the numbers – and you have to take the Chinese numbers with more than a shaker of salt – we’ve long thought that residential real estate was probably 20% of GDP and that all in, real estate construction and related services was about 25%. Ken Rogoff came out with a study last year that said it was 29%. That’s already a huge amount compared to other countries.

Well, the numbers that the Wall Street Journal just put out were staggering, implying that there were 1.6 million acres of residential real estate under construction. If you do the math, it’s the equivalent of 72 million apartments. We believed that they were selling 20 million a year, but the WSJ story seems to imply that the numbers are actually much, much bigger. That tells me that our numbers and Rogoff’s numbers regarding GDP are probably on the low side. It could be a 30-40% problem, not a 20-25% problem. It’s just magnitudes bigger. We’ve never seen anything like this. And there’s no game plan, no historical analog. Maybe Tokyo in ’89? But this is worse than that. It’s worse than Spain in ’06 or Ireland in ’06. We’ve just never seen an economy this dependent on putting up apartment buildings — apartments that nobody is residing in. Everybody already has an apartment! These additional ones are second and third apartments at this point, and only for people who can afford them because they’re extremely expensive.

I think the Chinese government has convinced themselves that by borrowing lots of money from their own citizens and elsewhere, that there’s ongoing activity that is sustainable. But as we find out in every real estate bubble that bursts, when your activity is constructing real estate itself and you’re taking capital and turning it into income by paying construction workers and real estate brokers and everybody else, when that activity ends, it goes poof! And there’s no income from the asset you’ve just financed. It’s not like building a factory where you have demand for your products. It’s just apartments sitting empty in Beijing or Shenzhen.

LP: How does this problem relate to Chinese politics?

JC: As all of this is happening on the financial and economic front, along with the crackdown on business elites, we’ve seen a commensurate rise in bellicosity, in saber-rattling toward Taiwan, India, and Tibet. We’ve seen a much more aggressive posture from Xi in relating to the West. Now every day there’s a warning in one of the Chinese Communist Party organs threatening Australia if they come to Taiwan, threatening Japan. I don’t know if the Party is preparing the citizenry for a “them.” Someone to blame.

LP: As we’ve seen with the pandemic already.

JC: Yes, and in the way they’ve treated the West’s outrage about the concentration camps in Xinjiang province. That’s the classic authoritarian move. We know it from our own country. Blame someone. “It’s their fault, not our fault.” We need an enemy. I don’t know how real the saber-rattling is. Is it a distraction from domestic belt-tightening that’s coming? Planting the idea that we’re going through hard times because the whole world is against us? We’ll see. It’s an incredibly interesting time to be watching China.

LP: What does it all mean to the rest of the world?

JC: Again, I think it’s not a financial transmission issue reverberating through the financial systems and markets. I do think that it will affect global growth. China was a full point of the 3% global real growth we’ve had since the GFC. Without China, it’s 2%. So China itself, by growing 7 or 8% a year was a disproportionate amount of global growth. It’s also going to impact what I call Greater China, which is Taiwan, South Korea, Singapore – the areas that trade very actively with China. And it will definitely impact commodity exporters. In this massive build-out, China has continued to suck in iron ore and copper and all kinds of things from a variety of different countries like Brazil and Australia. But I think that the impact might be more political than financial. That’s what worries me.

LP: How would you characterize these worries?

JC: It’s the rise of bellicosity, the rise of a more militant China as the economy and the financial situation has gotten more precarious. That’s a 1930s kind of problem. We know that a rise in authoritarianism and statism around the world was one of the upshots of ’29-’32. You had leaders saying, “I’m the one that can get us out of this problem” and “They are the ones who got us here.” This situation in China is a little bit frightening to the student of history, because there’s no doubt, whether you’re flying over Taiwan airspace or coming close to ships in the South China Sea, that there’s a rise of tensions in and around China. I don’t think it’s a coincidence.

LP: To touch on Xi’s crackdown on the tech industry, how do you view that in the context of the need to lessen this dependency on the real estate sector? Certainly, we can see in our own case with Silicon Valley — Facebook and so on — that poorly regulated tech is a problem. But what does Xi’s stance mean in the context of his desire for China to be a leader in innovation, on the cutting edge of technology?

JC: That was always one of the responses to our concerns about the investment-driven model. People said, well, everyone does everything on their smartphone in China. They’re far more advanced in social media than we are and more advanced in payment systems, and so on.

The problem was that, number one, it gave rise to these global tech celebrities, and number two, I think China, or the Party, realized a little bit later than they might have that the control of databases and information that these companies have is certainly a power center. And the one thing that the Communist Party cannot brook is a threat to its control. There are no other political parties, no free press. The only thing that could challenge control is the thing that people said would liberalize China – the internet. Access to the internet, access to ideas, access to global media. People thought these things would democratize China, but Xi is saying no: we’re going to put up a Great Firewall and we’re not going to allow Alibaba to have as much power as the Party.

LP: And it looks like he’s going after the banks next.

JC: The real estate system is so big, and so levered – the banking system has grown with it, of course. It seems to me that Xi is basically going through all the power centers — technology, finance, etc., and cracking down. He’s making sure his people are completely in charge and that there’s no interference, no other power centers. And it makes me ask why. What’s the end game? I mean, the Party has control of the country for the most part. The citizens understand that. So why? What is coming that he feels he needs to make sure that all of his people are in control? I can’t help but think of Stalin. The end game puzzles me the most. Is it to prepare for a takeover of Taiwan? To be more forceful on the international stage? I don’t know.

LP: What is distinct about China’s vision of capitalism in the context of a one-party system? What are its particular features and challenges?

JC: What distinguishes China and what makes it so unique from my perspective, putting on the financial historian’s hat, is that the speed at which they developed was unprecedented, and the amount of risk they have taken to do that is unprecedented. Their banking system is now the largest in the world. The amount of real estate construction is just completely insane, and until, perhaps, this past 12 months, we haven’t seen a real, serious effort to say, “Maybe we should rethink this fantasy where everybody is going to have six apartments. Maybe we need to do other things in our economy to balance it out.”

How are they going to deal with the transition? Because they’re going to have to do it at some point. I think it’s going to be fascinating to see how they try to get out of it. Do they switch spending to defense spending? Do we get an arms race? Can they keep a closed currency? There are a whole lot of big questions.

They’ve got to make some tough decisions on how the economic model is going to work going forward. In the late ‘80s, everybody thought Japan was going to surpass the U.S., but they had the same problems – a banking system that was bloated, real estate prices too high, too dependent on exports, and they’ve had 30 years of muddling through. The idea that China is going to be growing 6 or 7% while the rest of the world is growing 2% just has to be revisited. It’s not gonna happen. That realization is going to be the bucket of cold water that’s going to force them to rethink next steps. The population has been used to this leveraged prosperity, and everybody has borrowed money to buy real estate. What are the next steps? It’s otherworldly what they have done with real estate. Whatever happens, it’s going to be severe somehow. Whether it’s politically or financially — whatever it is, it’ll be severe.

Tyler Durden Wed, 10/20/2021 - 22:10

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“The Omicron Variant” – Magic Pills, Or Solving The Africa Problem?

"The Omicron Variant" – Magic Pills, Or Solving The Africa Problem?

Authored by Kit Knightly via Off-Guardian.org,

Yesterday the WHO labelled the sars-cov-2 variant B.1.1.529 as a “variant of concern” and officially named it “Omicron”.

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"The Omicron Variant" – Magic Pills, Or Solving The Africa Problem?

Authored by Kit Knightly via Off-Guardian.org,

Yesterday the WHO labelled the sars-cov-2 variant B.1.1.529 as a “variant of concern” and officially named it “Omicron”.

This was as entirely predictable as it is completely meaningless. The “variants” are just tools to stretch the story out and keep people on their toes.

If you want to know exactly how the Omicron variant is going to affect the narrative, well The Guardian has done a handy “here’s all the bullshit we’re gonna sell you over the next couple of weeks” guide:

  • The Omicron variant is more transmissable, but they don’t know if it’s more dangerous yet (keeping their options open)

  • It originated in Africa, possible mutating in an “untreated AIDS patient” (sick people are breeding grounds for dangerous “mutations”)

  • “it has more than double the mutations of Delta…scientists anticipate that the virus will be more likely to infect – or reinfect – people who have immunity to earlier variants. (undermining natural immunity, selling more boosters, keeping the scarefest going)

  • “Scientists are concerned” that current vaccines may not be as effective against the new strain, they may need to be “tweaked” (get your boosters, and the new booster we haven’t invented yet)

  • “Scientists expect that recently approved antiviral drugs, such as Merck’s pill, will work as effectively against the new variant” (more on this later)

  • It’s already spreading around the world, and travel bans may be needed to prevent the need for another lockdown

We’re already seeing preparations for more “public health measures”, with the press breathlessly quoting “concerned” public health officials. We’re being told that a new lockdown won’t be necessary…as long as we remember to get boosted and wear masks and blah blah blah.

Generally speaking, it’s all fairly boilerplate scary nonsense. Although it is quite funny that the Biden administration has already put a bunch of African nations on a travel ban list, when Biden called Trump a racist for doing the same thing in 2020.

AFRICA

It’s interesting that the new variant has allegedly come from Africa, perhaps “mutating in the body of an AIDS patient”, since Africa has been the biggest hole in the Covid narrative for well over a year.

Africa is by far the poorest continent, it is densely populated, malnourishment and extreme poverty are endemic across many African nations, and it is home to more AIDS patients than the entire rest of the world combined. And yet, no Covid crisis.

This is a weak point in the story, and always has been.

Last Summer, the UK’s virus modeller-in-chief Neil Ferguson attempted to explain it by arguing that African nations have, on average, younger populations than the rest of the world, and Covid is only a threat to the elderly. But five minutes of common sense debunks that idea.

The reason Africa has a younger population, on average, is that – on average – they are much sicker.

There are diseases endemic to large parts of Africa that are all but wiped out in most of the Western world. Cholera, typhus, yellow fever, tuberculosis, malaria. Access to clean water, and healthcare are also much more limited.

And while it has been nailed into the public mind that being elderly is the biggest risk factor for Covid, that is inaccurate. In fact, the biggest risk factor for dying “of Covid” is, and always has been, already dying of something else.

The truth is that any REAL dangerous respiratory virus would have cut a bloody swath across the entire continent.

Instead, as recently as last week, we were getting articles about how Africa “escaped Covid”, and the continent’s low covid deaths with only 6% of people vaccinated is “mystifying” and “baffling” scientists.

Politically, African nations have shown themselves far less likely to buy into the “pandemic” narrative than their European, Asian or American counterparts. At least two “Covid denying” African presidents – Pierre Nkurunziza of Burundi and John Magufuli of Tanzania – have died suddenly in the last year, and seen their successors immediately reverse their covid policies.

So maybe the Omicron Variant is a way of trying to fold Africa into the covid narrative that the other continents have already fully embraced. That will become clear as the story develops.

Of course, it’s also true that being “African” is media shorthand for being scary, relying on the deeply-seated xenophobia of Western audiences. See: “Africanized killer bees”.

But, either way, Africa is the long game. There’s a more obvious, and more cynical, short term agenda here.

THE MAGIC PILLS

Let’s go back to the Guardian’s “Omicron” bullet points, above:

  • Scientists are concerned by the number of mutations and the fact some of them have already been linked to an ability to evade existing [vaccine-created] immune protection.

  • Scientists expect that recently approved antiviral drugs, such as Merck’s pill, [will work effectively] against the new variant

The “new variant” is already being described as potentially resistant to the vaccines, but NOT the new anti-viral medications.

Pharmaceutical giants Merck and Pfizer are both working on “Covid pills”, which as recently as three days ago, were being hyped up in the press:

US may have a ‘game changer’ new Covid pill soon, but its success will hinge on rapid testing

In the US, an emergency use authorisation can only be issued if there is no effective medication or treatment already available, so the vaccines not being proof against Omicron would be vital to rushing the pills onto the US market, at least.

If Omicron is found to be “resistant to the vaccines”, but NOT the pills, that will give governments an excuse to rush through approving the pills on an EUA, just as they did with the vaccines.

So, you bet your ass that testing is gonna be “rapid”. Super rapid. Blink-and-you’ll-miss-it rapid. Rapid to the point you’re not even sure it definitely happened. And now they have an excuse.

Really, it’s all just more of the same.

A scare before the new year. An excuse to make people believe their Christmas could be in peril. An exercise in flexing their control muscles a bit, milking even more money out of the double-jabbed and boosted crowd, now newly terrified of the Omicron variant, and a nice holiday bump to Pfizer’s ever-inflating stock price.

At this point either you can see the pattern, or you can’t. You’re free of the fear machinery, or you’re not.

There is one potential silver lining here: It feels rushed and frantic. Discovered on Tuesday, named on Friday, travel bans on Saturday. It is hurried, and maybe that’s a reaction to feeling like the “pandemic” is losing its grip on the public mind.

Hopefully, as the narrative becomes more and more absurd, more and more people will wake up to reality.

It has been pointed out that “Omicron” is an anagram of “moronic”.

One wonders if that’s deliberate and they’re making fun of us.

Tyler Durden Sat, 11/27/2021 - 23:45

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Israel Moves To Ban All Foreigners From Entry Amid Omicron Variant Fears

Israel Moves To Ban All Foreigners From Entry Amid Omicron Variant Fears

Israel’s Knesset is set to hold a special emergency "coronavirus cabinet" late Saturday night where government officials will vote on enacting a complete closure of…

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Israel Moves To Ban All Foreigners From Entry Amid Omicron Variant Fears

Israel's Knesset is set to hold a special emergency "coronavirus cabinet" late Saturday night where government officials will vote on enacting a complete closure of the country to foreign travel. The ban will tentatively be in effect for the next two weeks.

Already Israel has banned all foreigners arriving from the majority of African countries in recent days on fears that the highly-mutated Omicron coronavirus variant, which first emerged in South Africa, could be the next deadly wave - and with the vaccine possibly doing little to stop it.

AFP/Getty Images

The greatly tightened travel and tourist restrictions are expected to be announced late Saturday night or early Sunday. It's expected to also include a new mandatory quarantine of three days or more for vaccinated Israeli citizens who've returned from traveling abroad. For unvaccinated inbound Israeli citizens the quarantine will be a week.

The fresh travel rules come as authorities scramble to do contact tracing on exposures related to at least one confirmed Omicron case:

Authorities are scrambling to locate 800 Israelis who may have been exposed to the new Omicron variant of COVID-19, a defense official said Saturday.

The Health Ministry confirmed one case of the new variant in Israel, and said there were seven other suspected cases who were awaiting test results.

Four of the suspected cases returned to Israel recently from international travel, and three had not traveled, raising fears of community transmission in Israel.

Prime Minister Bennett ahead of the vote said the government is "preparing for any scenario." And concerning the new still somewhat mysterious variant, the country's interior minister said, "It looks like it might be more infectious, so we’re taking action as fast as possible."

Just days ago the health minister Nitzan Horowitz announced that Israelis will likely have to get a fourth shot, also as children between the ages of 5 to 11 have begun receiving the jab. Ironically the foreign tourist ban is now being re-imposed for one of the most highly vaxxed nations on earth.

At least 80% of all Israelis 16 and older are now considered fully vaccinated.

Tyler Durden Sat, 11/27/2021 - 23:15

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Mexican Authorities List Conditions To Reboot “Remain In Mexico” Program

Mexican Authorities List Conditions To Reboot "Remain In Mexico" Program

Authored by Tom Ozimek via The Epoch Times,

Mexican authorities have laid out a series of conditions for reviving the “Remain in Mexico” program, the Trump-era…

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Mexican Authorities List Conditions To Reboot "Remain In Mexico" Program

Authored by Tom Ozimek via The Epoch Times,

Mexican authorities have laid out a series of conditions for reviving the “Remain in Mexico” program, the Trump-era framework under which asylum-seekers were returned to Mexico to await the processing of their claims, with the development coming in context of the Biden administration’s plans to reinstate the policy following a court order.

Mexico’s Foreign Ministry said in a Nov. 26 announcement that talks have “intensified” with the United States on rebooting the program, known as the Migrant Protection Protocols (MPP), but that Mexican authorities are waiting for a formal response from the Biden administration on a number of concerns.

“The government of Mexico … has raised various concerns of a humanitarian nature regarding the asylum procedure in the United States,” the ministry said, adding that it has “highlighted the need to improve conditions for migrants and asylum seekers, so that they have better legal advice” regarding the processing of their clams, which Mexico said, “must be carried out as expeditiously as possible.”

One of the conditions is for the United States to accelerate development programs for southern Mexico and Central America in order to address the root causes of migration.

Another is for Washington to offer individuals deported under the MPP program medical care and vaccination against COVID-19 “to protect their right to health and prevent the spread of COVID-19 in communities on both sides of the border.”

Mexico has also requested that the United States respect designated return points, taking into account local security conditions and the capacity of Mexican authorities “to provide adequate care to migrants.”

Another “essential” request is for Washington to provide funding for shelters and non-government organizations “in order to improve conditions for migrants and asylum seekers in a substantive way.”

The demands come as talks between the two countries continue on reimplementing the MPP program after a court in August ordered that the Department of Homeland Security (DHS) reverse its June decision to halt the policy.

“In compliance with the court order, we are working to reimplement MPP as promptly as possible,” DHS spokesperson Marsha Espinosa told Axios.

”We cannot do so until we have the independent agreement from the Government of Mexico to accept those we seek to enroll in MPP,” Espinosa added.

“We will communicate to the court, and to the public, the timing of reimplementation when we are prepared to do so.”

The Biden administration is facing an unprecedented surge in illegal immigration that critics say is fostered by its lax enforcement policies, including halting MPP and curtailing the use of Title 42, which is used to expel illegal immigrants during the COVID-19 pandemic.

Tyler Durden Sat, 11/27/2021 - 16:45

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