From: S. Kalyanaraman
Date: Mon, Jan 17, 2011 at 5:38 PM
Subject: China an 'enormous tail-risk'. Get short on China.
To:
Hedge funds bet China is a bubble close to bursting
The world is looking to China as a springboard out of recession - but some hedge funds are betting the country's credit and growth levels cannot be sustained.
For his first-ever speech as Britain's new Minister of Trade & Industry last week, Lord Green faced a formidable audience of 400 Chinese and British business delegates.
Green didn't need to go over Britain's experience during the same period for most to agree that plugging into China's blistering growth - predicted by the IMF to be 10.5pc this year - was of "vital importance" to the UK.
But even as he spoke a hedge fund manager in Mayfair was poring over spreadsheets of sovereign and corporate credit default swaps, interest rate and foreign exchange options with one aim: to "get short on China".
The manager, who wanted to remain anonymous, said: "The Chinese delegation has said all week that there will be double-digit growth for years to come and the Brits have lapped it up. But the data doesn't add up. We think we've experienced credit bubbles over the past few years, but China is the biggest. And yet the global economy is looking to China as not just a crutch but a springboard out of the recession. It's crazy."
He is not alone. Hugh Hendry, a former star of Odey Asset Management, has launched a distressed China fund at Eclectica Asset Management.
He follows Mark Hart of Corriente Advisors, the American hedge fund manager who made millions of dollars predicting both the subprime crisis and the European sovereign debt crisis, who started a fund based on the belief that rather than being the "key engine for global growth", China is an "enormous tail-risk".
There have been academics and analysts who have argued about the dangers of China's economy overheating for some time. But for many, the fact that hedge funds, particularly those with track records on previous crises, are launching specific funds is the sign that the bubble is close to bursting.
One academic said: "Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of 'distress China' funds is a sign to sit up."
More analysts are becoming bearish too. Last week, Lombard Street Research put out a note warning of China's "already dangerously home-grown inflation".
The analysts said figures showing the continuing boom in China were far from welcome: "On the contrary, Chinese policymakers have to slam on the brakes." The financiers are warning that rather than depending on China as the prop of the recovery plan, Britain needs to be braced for another shock.
A recent study by Fitch concluded that if China's growth falls to 5pc this year rather than the expected 10pc, global commodity prices would plunge by as much as 20pc. China is the global price-setter for oil, coal and base metals.
According to Corriente Advisors: "We expect the economic fallout from a slowdown of China's unsustainable levels of credit and growth to be as extraordinary as China's economic outperformance over the past decade."
The financiers' arguments centre on the belief that China's demand is not real but manufactured by the state.
The Mayfair hedge fund manager said he started work when he saw some news reports on China's "ghost towns". Last year Al Jazeera, the Middle Eastern television channel, aired a short report from Ordos Shi, a city in inner Mongolia built for one million people that is almost entirely empty. The report reveals empty streets, housing estates, shops and restaurants. The locals prefer the old town of Ordos and tell the cameras there's no need to move to the new city.
According to Corriente, China has consumed just 65pc of the cement it has produced in five years, after exports. The country is outputting more steel than the world's next seven largest producers combined. It has 200m tons of excess capacity.
In property, Corriente said it had found an excess of 3.3bn square metres of floor space in China – yet 200m square metres of new space is being constructed each year.
Despite the vast population, the property is generally out of the price range for most. House prices are around 22 times disposable income in Beijing. The IMF has said that house prices in eastern cities have become "increasingly disconnected from the fundamentals" but so far has said there is no nationwide bubble.
Professor Victor Shih of Northwestern University, Illinois, estimates that Chinese banks have lent $1.7 trillion (£1.1 trillion) to local state entities, many of which are not commercially viable and have used inflated land values as collateral.
Experts in China dismiss the hedge funds' arguments as narrow and exaggerated. The Chinese government has implemented policy measures to curb credit and control inflation. Above all, they argue that China's huge and modernizing population will fuel demand for years.
Even the hedge funds concede that their timing might not be perfect. Corriente warns that investors, who are required to put in a minimum of $1m each, should brace themselves for an estimated burn-rate of 20pc a year until the theory pays off. But it's a risk that plenty seem willing to take.
1 comment:
Did you know about the Indian born B-52 expert behind China's stealth technology?
Has China's new jet launched a stealth arms race?
Once the J-20 is deployed, in that scenario, US top guns would lose their high-performance stealth advantage and no longer rule the skies.
No so fast, says Aviation Week. New, more powerful radars using active electronically scaled arrays can pick up fainter and fainter targets, and are fast catching up to stealth technology. "Anti-stealth will bring into question all stealth designs," it says, hinting that the US may already have airborne radars able to spot stealth aircraft.
Moreover, perfecting stealth technology takes time. The US started its F-22 programme in the 1980s. To an experienced eye, the stealthy look of the Chinese jet "is just sort of cobbled together," Teal group analyst Richard Aboulafia told The Wall Street Journal. He thinks China may be able to deploy the new aircraft in a decade, but by then the US should have better technology.
Post a Comment