Top Investors Betting on China’s Downfall

James West
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By Louise Armistead
Telegraph.co.uk
January 20, 2011

While the official data continues to paint a picture of an economic powerhouse, some of the most respected financial brains in the world are doing everything they can to “short China”.

Jim Chanos, the hedge fund manager who famously made millions by uncovering and betting on the demise of Enron, has said he is now betting against China.

His view is that China’s growth is based on a huge credit bubble backed by inflated property prices – and that the bubble is now so big that the Chinese government will not be able to engineer a soft landing.

He backed by 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”.

In London, Hugh Hendry, a former star of Odey Asset Management, has launched a distressed China fund at Eclectica Asset Management.

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As The Sunday Telegraph reported, the key argument is that China’s ferocious consumption is not drive by demand. For instance, Corriente’s research has found that 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.

There’s an excess of 3.3bn square metres of floor space in China – yet 200m square metres of new space is being constructed each year.

And behind it all, the bears say, is a looming banking crisis. Professor Victor Shih of Northwestern University, Illinois, estimates that Chinese banks have lent $1.7 trillion (£1.1 trillion) to businesses which are not commercially viable.

Experts around the world. have dismissed the hedge funds as short-term speculators or even trouble-makers.

But on Tuesday Goldman Sachs, the Wall Street trail blazer, issued a short-term alert on China, as well as the other BRIC countries

Tim Moe, the bank’s chief Asia-Pacific strategist, told at conference in London: “To be frank, we may have held on too long to our overweight position in China last year. We have decided that discretion is the better part of valour and have tactically reduced our weight. Asia is not in the sweet part of the cycle. The longer-term picture of Asia outperforming the US is taking a breather.”

The bank is not as bearish as the hedge funds – it thinks China will rebound strongly in the second half of the year.

But the analysis, and the growing number of bearish hedge funds, is making plenty of traders look at China’s growth figures in a new light.

James West

James West

Editor and Publisher

I employ a Capital Efficiency Model that dictates money should never be exposed for longer than is absolutely necessary to the possibility of being lost. Thus, I routinely sell half my position when a stock doubles from my entry price, and I sell stocks that lose 20%, unless there are...
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