British hedge fund manager Hugh Hendry is betting China’s “credit bubble” will burst, causing its economy to contract and triggering a global crisis.
Hendry’s Eclectica Asset Management has bought options on 20 companies in international markets that will profit from “a dramatic collapse” of China’s growth that’s been fueled by an unprecedented lending boom, Hendry said in a telephone interview from London on Monday.
Hendry joins hedge fund manager James Chanos and Harvard University professor Kenneth Rogoff in warning of a potential crash in China. The nation’s 13 trillion yuan (US$1.9 trillion) of new lending in the past 16 months, bigger than the economies of South Korea, Taiwan and Hong Kong combined, is spurring industrial capacity expansion in the same way Japanese credit built inventory during and after World War I, Hendry said.
“There are striking parallels with Japan in the 1920s, when ultimately the whole system collapsed,” said Hendry, 41, whose firm manages US$420 million in assets. “China could precipitate a much greater crisis elsewhere in the world.”
Japan’s export boom collapsed after the war amid excess global capacity, slashing growth and sparking a stock-market crash and bank runs.
Hendry’s flagship Eclectica Fund, a global macro hedge fund with US$180 million in assets, may gain almost US$500 million from its options if China’s economy plunges into a recession, he said. The options cost the fund about 1.5 percent of its net asset value annually, Hendry said.
China’s vulnerability to a crash comes from the “inherent instability” created by a lending binge for infrastructure projects that’s “unprecedented in 400 years of economic history,” Hendry said.
The country is also exposed to exports to a US economy that could shrink from US$14.6 trillion at the end of March to US$10 trillion within 10 years, he said.
Chinese officials allowed lending to surge starting in late 2008 to fight the global financial crisis. New loans rose to a record 9.59 trillion yuan last year and banks advanced another 3.38 trillion yuan in the first four months this year.
“China’s at the mercy of a credit bubble,” Hendry said. “Once you’ve unleashed the genie it’s out there. They are ultimately unstable and it’s that instability that creates their demise.”
The Shanghai Composite index of stocks has plunged 21 percent this year, the worst-performing index in Asia, as investors sold Chinese assets on concern a withdrawal of stimulus spending and a slowdown in construction could choke off growth after an 11.9 percent expansion in the first quarter.
China has cracked down on property market speculation and drained cash from the financial system via three increases this year in the proportion of deposits banks must hold as reserves.
China’s bubble may burst within a year or it may take three years, as Citigroup Inc economists Willem Buiter and Shen Minggao estimate, Hendry said.
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