HALFTIME REPORT - Jim Chanos: China is a Bubble Waiting to Burst

With investors worried about the future of the dollar, an upcoming Fed meeting and stocks hovering around 14 month highs, how are the biggest investors on Wall Street positioning themselves for the future? What is the big fish perspective on the state of the market?

To answer these questions, Fast Money has a special edition of the Halftime Report with legendary hedge fund manager James Chanos, the President and founder of Kynikos Associates, who gave viewers his perspective on the markets in a Halftime Report exclusive.

Fast Exclusive: James Chanos

The word on the street this week was how big banks, namely Wells Fargo and Citigroup , have set themselves to pay back the TARP. Chanos had held short positions on Wells Fargoin the past and is very familiar with the balance sheet, so how is he playing this stock now?

As most of the banks have raised significant equity capital recently, they have seen their stocks go up "initially, on a relief rally," Chanos says, but he thinks the jury is out on Wells Fargo, citing "reasonably difficult" loan problems ahead of them.

Chanos also sees the balance sheets of major banks being "better than they were 6-9 months ago," but he is also hesitant to say that the books are where they should be for the firms, again citing residential and commercial real estate loan problems as well as dramatic security mark-ups resulting from accounting changes. "I wouldn't be a buyer here," he says, "I don't know if I'd be a seller, but I would be pretty ambivalent about the sector." With a few minor exceptions, Chanos says he's staying away from the financials.

Chanos' Overall Market View

With markets just off 14-month highs, how does Chanos perceive the overall market?

Although Chanos' firm is always net-short, he says that in effect, he is "long the market, but short our stocks," and right now he sees opportunities for short sellers in individual companies and sub-industries, but not the overall market.

But what about the specifics?

Through the course of 2008 and early 2009, Chanos had been short covering the auto sector, and says the interesting part of the auto sector is that it has been "chronically" losing money, much like the airlines. Even with the bankruptcies of GM and Chrysler, we have seen increased global capacities for autos in the last 12 months. He sees the sector as a whole with the lingering problems of overcapacity, as well as legacy costs. He suggests that investors don't go long Ford or Fiat .

The airline sector has been relatively bullish of late, but how does this sector look in the coming months? Chanos is focusing on the parent of Airbus, EADS for shorting possibilities, highlighting a "myriad" of problems, which may potentially require government support for the company, which would not stand to benefit shareholders.

China: Powering the Global Economy, or the Next Bubble to Burst?

In a recent report, Chanos' firm has been very pessimistic about China, and his firm has even gone as far as to speculate that China could be "Dubai times 1000, or worse."

Chanos points out a stark irony that investors who decry government involvement in US companies are bullish on the Chinese markets, despite the fact that the country's government can "fine tune" the economy to their liking. He is also skeptical of the country's GDP numbers, calling them "massively inflated by under-depreciating a very, very, very shaky capital asset base."

He points out that "bubbles are best identified by credit excesses, not valuations... there is no bigger credit excess right now than China." But how do you play this?

Chanos says that although you can't short China, the short plays are in the first derivative industries: companies which support the raw and imported materials for growth (such as copper, cement and iron ore producers). He also suggests looking into short possibilities in the Hong Kong exchange.

Chanos himself is actively shorting this area, and is "looking for plays on the China investment pool, which we think will burst at some point... Demand in China is over-inflated, that is clear."

What do the FM traders think about the trades from Chanos?

To analyze the opinions of the legendary hedge fund manager, Guy Adami steps in.

On his Ford calls, Adami says "he's probably going to wind up being right," however, the traders have liked Ford since its lows and sees momentum through the end of the year, but agrees that right now is the time to be peeling back long positions in the company.

In China, Adami agrees that the visibility in the Chinese markets is a serious issue, speculating that they could be simply hording commodities instead of using them, suggesting the short possibility of Freeport McMoran, which has had a strong move to the upside and may be set for a drop.

Check out the video for the full analysis from Chanos!

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