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Betting against China... Is this wise?

Chinese economy | Betting against China... Is this wise? Anthony Harrington

The investment world always holds a handful of contrarians, those who, seeing the markets surging in one direction absolutely have to go short in the sincere and certain belief that what goes up, must come down. It stands to reason then, that there will be those who find the idea of betting heavily against the world’s biggest growth engine absolutely irresistible. China, they say, is a bubble ready to burst and they intend to be there with their ten gallon hats held out under the golden stream when it does. Others of course, point to the fact that every candle flame attracts its moths…

However, it has to be said that there are some very seasoned and savvy investors lining up in the China-must-bust camp. Corriente Advisors, one of the funds betting on a China smash, made hundreds of millions of dollars back in February betting against European bonds, according to the Dealbook, which itself was picking up a news item from Bloomberg. So Corriente has form making money for its investors out of locating and betting on structural dislocations in the global financial system. The Dealbook quotes Bloomberg:

“Corriente’s European Divergence Master Fund LP, set up in late 2007 anticipating the weakest European nations would have trouble meeting debt obligations, will make a $320 million payment to its backers next month, said the investors, who declined to be identified because the information is private.”

The relevance of this for our China argument is that the Dealbook goes on to quote yet another source, the Wall Street Journal, as saying that Corriente worked with China and Hong Kong specialists GaveKal Capital, run by Louis-Vincent Gave, on the European debt play. If Corriente is friendly with GaveKal (featured in one of my earlier China blogs) then it is probably going to be as well-briefed as it could be on the Chinese economy. So if Corriente feels confident that a China smash is coming, then that should make one sit up and take notice.

Mark Hart III, who runs Corriente, is reported as saying that he expects “an economic fall-out” that will be “as extraordinary as China’s economic out-performance over the last decade." Investors in his Corriente China Opportunity Fund are being asked for a minimum stake of $1 million and the fund is getting set to use CDSs, interest rate and forex options to cash in on the anticipated slowdown in the Chinese economy and an anticipated slump in the Renminbi against the dollar (this last would require quite a lot to happen first, as the Renminbi is currently universally thought to be undervalued against the dollar, and there is a quasi dollar peg in place preventing the currency from floating freely).

Hart reportedly told investors:

"Complacency among market participants regarding China is eerily similar to the complacency exhibited prior to the United States sub-prime crisis and European sovereign debt crisis."

He might be right, or he might be wrong, but as we shall see in Part 2, there are some very troubling features of the Chinese economy that will take careful managing if China is to keep on trucking…

Further reading on the Chinese economy and Asian economy:




Tags: central banks , China , GDP growth , global imbalances , liquidity , risk
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