Top hedge fund manager betting on China crisis

Bloomberg in Beijing
19 May 2010

Hedge fund manager Hugh Hendry is betting China’s “credit bubble” will burst, causing its economy to contract and triggering a global crisis.

The Briton’s Eclectica Asset Management has bought options on 20 companies in international markets that would profit from “a dramatic collapse” of China’s growth, which has been fuelled by an unprecedented lending boom, he said.

Hendry joins hedge fund manager James Chanos and Professor Kenneth Rogoff of Harvard University in warning of a potential crash in China.

The mainland’s 13 trillion yuan (HK$14.8 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 the first world war, 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 per cent 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 is “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 from 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 … that creates their demise.”

China’s bubble may burst within a year or it may take three years, as Citigroup economists Willem Buiter and Shen Minggao estimate, he said.

Hendry co-founded Eclectica in 2005 after six years at Odey Asset Management, where he won What Investment magazine’s fund-manager-of-the-year award in 2003.

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