China is still a success story (and Jim Chanos was wrong)

Five years ago, a high-profile hedge fund manager made a bold call. “Jim Chanos: China Is Headed For A Huge Crash” is how Business Insider put it.

Today, if you ask Joe Nocera of the New York Times, Chanos has been proven right. In a column headlined “The Man Who Got China Right,” Nocera writes:

The conventional view was that the Chinese economy would continue to grow at a rapid pace…

China’s economy began to slow right around the time Chanos first made his call. No matter: Most China experts remained bullish. Chanos, meanwhile, was shorting the stocks of a number of companies that depended on the Chinese market…

These days, with the markets in free-fall, it certainly looks like Chanos has been vindicated.

The fact is, however, that Chanos’s huge crash never came. On November 11, 2009, when the Business Insider headline appeared, the Shanghai Composite was trading at 3,175. Today, after Chanos’s “vindication,” it is trading at 2,965. That’s a fall of about 6.5% in five years. Not exactly a crash. In fact, the big stock-market crash was already in the past, at that point: the index was over 6,000 in October 2007.

Overall, the Chinese stock market has been going up over time, not down. There have been two big speculative bubbles – one in 2007, and the a smaller one in 2015 – but even after those bubbles burst, the long-term trend is clearly upwards rather than downwards.

And what about the Chinese economy, which Chanos said in 2009 was dangerously overheated and teetering towards collapse? Here’s a chart of China’s GDP, using official IMF projections from 2014 onward:

Again, the “collapse” is very, very hard to see. In fact, it never happened.

It’s impossible to know for sure whether Chanos made money or lost money on his China positions: we don’t know which stocks he shorted, and how much he paid to borrow them. But his big macro call was clearly wrong. A few days of stock-market volatility can’t change that basic fact.