Evidence the China Bubble is Edging Closer to a Pop

Round and round China goes, and where she stops, no one knows… but, at least a few hedge funds are wagering that China’s economy is in a bubble likely to pop soon. Fund managers, including Hugh Hendry at Eclectica Asset Management and Mark Hart of Corriente Advisors, are shorting the China boom. First, because they’re skeptical of whether real growth numbers are real — given that they are largely produced by the state — and second, because they don’t think its growth rate is sustainable, especially given multiple examples of investment misfires like Ordos Shi and the South China Mall.

For more details we turn to the Telegraph:

“…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.’ […] 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 case against China goes beyond development projects and infrastructure, to also include excess capacity in sectors ranging from residential real estate to bank credit to steel. The drama is bound to unfold as it will, but, with their shirts on the line, an increasing number of fund managers are betting big that the China story will eventually surprise to the downside. You can read more details in the Telegraph’s coverage of how hedge funds are betting that China is a bubble that’s close to bursting.

Best,

Rocky Vega,
The Daily Reckoning