Chanos_CHINA_PRES_for_Wine_Country_Conference_5_April_2016.pdfVIP

China: The Edifice Complex Wine Country Conference April 5, 2013 James Chanos Kynikos Associates The China Way ? What we have learned – Guanxi is a way of life – Caveat emptor in acquisitions – Beware reverse merger listings – “Audited” numbers ? What goes on in China Inc. – Gaming receivables – Questionable “Other Income” – Property on the side – Copper and steel financing ? Foreign technology partnerships – “Absorb and digest” – “Re-innovate” – Undercut partners Source: shutterstock 2 “The Number” Is Paramount ? GDP drives economic activity, not vice versa “GDP: Killing the Hen to Get the Egg” ? Countervailing priorities – Set centrally and locally – Stability for Central Government – Vehicle of ambition for local officials ? Regional-to-national GDP gap continues to grow – Gap of RMB 5.8T in 2012 vs. RMB 2.6T in 2009 – “Size of Guangdong’s economy”1 ? Capacity overinvestment 2008-2012 CAGR – Cement 12% – Steel 10% – Autos 18% Source: “GDP gap in China the size of Guangdong economy”, South Source: China Media Project China Morning Post, February 5, 2013 3 The Law Of Diminishing Returns ? Unprecedented fixed asset Gross Fixed Capital Formation/China GDP investment boom ? Gross fixed capital formation as a percent of GDP in China has increased from previously high levels over the past decade ? Law of diminishing returns ? Asset depreciation liabilities Source: National Bureau of Statistics of China 4 The ‘Shā Chén Bào’ Of Money is Wealth Destruction ? Large-scale capital projects grow sillier by the day Hard To Keep Up – New South China Mall – world’s largest and loneliest – New Ordos – empty city in Inner Mongolia – Sky City One – world’s tallest building to be built in only 90 days ? Massive infrastructure spending continues – 1,188 new shopping malls by 2015 – Airports: 14 opened in 2012 and 12 to be constructed in 2013 – Subways: 28 cities get approval to build or expand subw