Jim Chanos, a veteran short seller and founder of the Kynikos hedge fund, warns that should Evergrande collapse under its $300 billion debt, it would end China's decade-long real estate boom.
Chanos also said it would put any companies with exposure to China at risk. He made the remarks in an interview with The Financial Times on Wednesday. Chanos said that, unlike the demise of Lehman Brothers at the start of the 2008 mortgage-backed securities crisis that threatened systemic risk to the global banking system, Evergrande's problems would not spread as far.
For China, however, Chanos said its domestic economy could suffer greatly because Evergrande's economic model, i.e. heavy reliance on debt to fund growth, is emblematic of the "economic model" used by so many of its companies.
"If you try to deflate this bubble, it is fraught with risks," Chanos told The Financial Times. "I don't think they're contagion risks. This is not a Lehman-type situation where there is contagion [within and between banks] and everybody stops lending to everybody else. These is more a risk to the economic model because residential real estate is still such a huge part of the GDP there."
Chanos is known for correctly predicting and shorting Enron's collapse two decades ago and the mortgage-backed securities crisis that sparked the 2008 Great Recession 13 years ago.
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