With growth slowing, particularly in the real estate sector, Chinese banks have been a great place to bet against, hedge fund titan Jim Chanos told CNBC.
Chanos, the head of Kynikos Associates, has been betting against China — despite its role as a global economic leader — primarily because he believes the country is overbuilt and does not have the internal demand to support its ambitious growth plans.
Nowhere has that trend been more apparent than in the banking system.
"If you looked at the performance of the banks over the last two years...they have been great shorts," Chanos said during an interview on "Squawk Box." "They have been going down — they're down 30 percent over the last two years."
An exchange-traded fund that tracks the Chinese banks, the Global X China Financials , is off about 27 percent since peaking in November 2010.
Much like in the U.S., there has been talk about breaking upChina's large financial institutions because of the danger their failure would pose to the broader economy. And, like the American quandary, taking down the big banks is be easier said than done.
"I would believe it when I see it to break up the banks," Chanos said. "In China, remember, the the banks are arms of state policy. They loan because the local party official or regional party official tells them we need a new stadium. They are instruments of state policy. I really doubt the party is going to give up a lever of power by breaking up the banks."
The Communist Party has been rocked lately by scandal, as the wife of local party chief Bo Xilai is a suspect in the murder of British businessman Neil Heywood.
For the Chinese political system, the case is a game-changer, in that Bo was considered a rising star in the party and possibly headed for its top position.
"Some people have dubbed the party 'The Family,'" said Chanos, comparing the communists to the American Mafia. "We're seeing more than a peek behind the curtain, we're seeing a real struggle."