Short seller Chanos on China: 'It's worse than you think'

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Lingering concerns about China have helped drive stock selling, but investors may still underestimate how much the world's second-largest economy has slowed, short seller Jim Chanos said Friday.

"It's worse than you think. Whatever you might think, it's worse," he said.

Chanos, of Kynikos Associates, appeared on CNBC's "Fast Money: Halftime Report" on Friday amid the fourth straight day of losses for major U.S. averages. The Dow Jones industrial average, and Nasdaq were setting up for their worst weeks since 2011.

He did not classify the drop as a correction or a bear market. But he noted that the yearslong runup in U.S. stocks shows "we've gotten a little complacent."

China's slowdown, among other macroeconomic concerns, has spooked global investors. Beijing's handling of a stock market spike, "panic responses" from investors and recent currency devaluation has "given investors pause," Chanos added.

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"People are beginning to realize the Chinese government is not omnipotent and omniscient," he said. "In fact, like many of us, sometimes they don't have a clue."

He added that investors should forget about the performance of the Shanghai composite, but instead focus on how declining GDP growth and the Chinese consumer could affect American companies with exposure to the country.

Concerns about demand in China, one of the world's largest energy consumers, has added pressure to already sagging commodities. Crude oil fell again on Friday, with West Texas Intermediate breaking below $40 per barrel for the first time since 2009.

A slowdown in consumption has fueled additional concern about what many observers have already called an oversupplied market.

"Now that demand is flagging a little bit, the oversupply situation has just swamped the real demand," he noted.

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Chanos is "betting against a number of the big guys" in the energy sector, he added. He dislikes Shell and Chevron, in particular.

Chanos' short bets

Shares of residential solar provider SolarCity have also struggled amid the drop in energy prices, falling nearly 38 percent in the last year. Chanos unveiled a bet against the stock Friday, outlining its continued losses and what he sees as weakness in its operating model.

SolarCity was down about 8 percent in Friday afternoon trading.

Hewlett-Packard, another stock Chanos shorts, was trading about 4 percent higher Friday, a day after the company reported mixed quarterly earnings. HP's revenue declined 8 percent from a year ago, with its legacy personal computer and printing businesses continuing to decline.

In a CNBC interview Friday, HP CEO Meg Whitman downplayed concerns about slowing growth, touting the company's progress in enterprise computing and strong placement in the PC market. Chanos, though, contended HP faces significant hurdles ahead of a split later this year.

"We think it's challenged business. Despite Meg's best efforts, I think they're in businesses that are in secular decline," he said.

Read MoreHP earnings: 88 cents per share vs expected EPS of 85 cents

Shares of HP have plunged 30 percent this year.

He also remains short in Caterpillar, saying heavy equipment companies will have "the wind in their face" for the foreseeable future.