REUTERS SUMMIT-Short-seller Chanos says China seeing faster capital flight

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By Sam Forgione

NEW YORK, Oct 28 (Reuters) - Hedge fund manager Jim Chanos, who has a long-running bet against China, said that the country's credit bubble was starting to cause capital outflows to accelerate and may ultimately lead to weakness in the nation's currency.

Speaking at a Reuters summit on Tuesday, the prominent short seller pointed to overbuilding in residential housing in China and the increasing cost of building gaming properties in nearby Macau as evidence that the bubble was getting worse.

He believes investors are starting to take notice.

"It's safe to say it's accelerating," said Chanos, speaking of capital flight out of China, and said China's quarterly drop in foreign exchange reserves was "noticeable."

China's foreign exchange reserves fell in the third quarter by $105.5 billion, the first quarterly fall since 2012 and the largest dollar decline on record, according to People's Bank of China data.

The 2.6 percent decline was the biggest percentage drop since 1993. Massive capital inflows have fueled money supply growth that has underwritten heavy investment in the country, and a prolonged outflow would be seen as a sign that investors were worried about China's ability to keep growing and servicing its debt.

Chanos, the founder of Kynikos Associates, specializes in making money when stock prices decline. China's CSI300 Index hit 13-month highs earlier this month, but the index is still nearly 60 percent below a peak hit in October 2007.

He said the weak quarterly results from U.K.-based Standard Chartered Plc's underscored the negative impact of China's overheated credit market. The bank said Tuesday that operating profits fell 16 percent on a year-over-year basis in the third quarter.

"We always watch foreign banks in other markets, because they're usually always late to the party," Chanos said in reference to Standard Chartered (HKSE: 2888.HK - news) . He said that the bank's mention on Tuesday that it was watching its exposure to commodity markets and China suggests they may have been hit by the country's credit bubble.

Standard Chartered warned investors Tuesday that profits would fall in the second half of this year, after quarterly earnings were hit by a surge in bad loans and higher regulation and compliance costs. Its London-listed shares tumbled more than 8 percent to their lowest level for five years.

Chanos estimated Tuesday that China was building about 20 million condominiums each year while selling just 4 million to 5 million, a sign of overinvestment. He said that he would advise investors to avoid Asian financial institutions.

Chanos also said he is betting against Macau, a Chinese territory that is home to the world's largest legal gambling and casino business. He likened Macau to the overbuilding in Las Vegas and warned that Macau businesses were putting up more capital than ever for less in return.

Chanos said Macau's capacity is about to increase by 30 to 40 percent over the next 18 months and 100 percent over the next two to three years.

"The stuff that is being built, as that's happening, the revenues have now turned down due to credit crunch, corruption, all the things we've been talking about. Take your pick."

"I think the estimates are going to come down huge," Chanos said about Macau casino companies.

Chanos said Macau is following a pattern seen decades earlier in Las Vegas, when hotels and casinos elected to put more capital in amenities to draw customers - thus hurting profits. "Well, that's Macau now. Macau is what Vegas was in 60s and 70s until it was changing," he said.

One of Macau's more prominent investors is Wynn Resorts (NasdaqGS: WYNN - news) , which reported operating income of $234.9 million from its Macau operations in the third quarter. Casino mogul Steve Wynn is suing Chanos for slander, saying Chanos told several people in April that Wynn and his company violated the federal Foreign Corrupt Practices Act. Chanos would not comment on the lawsuit on Tuesday.

Chanos is known for having shorted Enron Corp stock many months before the energy trader's December 2001 bankruptcy. (Editing By Cynthia Osterman)