Euro is peanuts - next big bang is China

Wednesday 01 December 2010

Telegraph.co.uk

Hedge fund manager Mark Hart bets on China as the next 'enormous credit bubble' to burst

Mark Hart, an American hedge fund manager who has made millions predicting the crises in US sub-prime market and European debt, has launched a fund to bet on the imminent implosion of China.

... Raw materials: Corriente says China has consumed just 65pc of the cement it has produced in the past five years, after exports. The country is currently outputting more steel than the next seven largest producers combined – it now has 200m tons of excess capacity, more that the EU and Japan's total production so far this year.
Property construction: Corriente reckons there is currently an excess of 3.3bn square meters of floor space in the country – yet 200m square metres of new space is being constructed each year.
Property prices: The average price-to-rent ratio of China's eight key cities is 39.4 times – this figure was 22.8 times in America just before its housing crisis. Corriente argues: "Lacking alternative investment options, Chinese corporates, households and government entities have invested excess liquidity in the property markets, driving home prices to unsustainable levels." The result is that the property is out of reach for the majority of ordinary Chinese.
Banking: As with the credit crisis in the West, the banks' exposure to the infrastructure credit bubbles isn't obvious because the debt is held in Local Investment Companies – shell entities which borrow from Chinese banks and invest in fixed assets.
Mr Hart reckons that "bad loans will equal 98pc of total bank equity if LIC owned, non-cashflow producing assets are recognised as non-performing.
As a final blow, Mr Hart says that the market belief that the Chinese government has "ample resources" to bail out its banks is flawed.
Corriente's analysis of the ratio of China government debt to GDP comes out at 107pc – five times higher than official published numbers. The hedge fund says this number uses "conservative assumptions" and the real figure could be as high as 200pc.
The result is that, rather than being the "key engine for global growth", China is an "enormous tail-risk."
He is so convinced by his arguments that he has warned investors that the fund, called the China Opportunity Master Fund, is prepared to "burn" 20pc of their cash each year until his theories are proved.
Comment: Short China!