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'hugh Hendry Shorts China, Betting On 1920S Japan-Like Crash '

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http://www.bloomberg...id=aFxARdvFHFpI

'May 18 (Bloomberg) -- 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 May 17 telephone interview from London.

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 ($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 $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 $180 million in assets, may gain almost $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.

Lending Binge

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 U.S. economy that could shrink from $14.6 trillion at the end of March to $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 in 2009 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.

Property Crackdown

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. '

some good points as ever,as ever,timing the obvious is incredibly hard when you're trying to second guess what CB and politicians will do in order to survive.Mish ahd a good piece on specualtive mania in CHina 30/3/2010

http://globaleconomi...a-in-china.html

this will all end in tears it's jsut a matter of when.

I won't be holding my breath.

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Then just think of all those pension funds who have invested your nest-egg in China and her satellites in order to protect it from the collapse in the US? Certainly China can now pull the world into the abyss when she fails.

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http://www.bloomberg...id=aFxARdvFHFpI

this will all end in tears it's jsut a matter of when.

Yep.

I'd like to know how he's managing this:-

Hendry’s flagship Eclectica Fund, a global macro hedge fund with $180 million in assets, may gain almost $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.

If you find out let me know.

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Saudi Arabia did the same thing in the late 70's to mid 80's. Loads of projects, housing just sat empty. But it never crashed because it was internally funded, as compared to Dubai, for example.

China's development has been internally funded, as far as I am aware. There may be some private sector pain, but I wouldn't want to bet on a 'collapse'. Heck the average income of the country is still about 100th in the world. Not a lot of room for a crash in that kind of environment.

Biggest problem for China is a lack of international demand for their products. But, for them, that just means more farming, until the world economy picks up again.

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Yep.

I'd like to know how he's managing this:-

If you find out let me know.

It's not his only trade.

These black-swan type (Taleb) option trades always have a carry cost and 1.5% p.a. is acceptable and the 500M is in range. He's spotted an asymmetry of risk return and that's why he's where he is. If he waited to be more sure on the timing, he'd be paying a lot more for the option.

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be careful who you listen to.

Foreign direct investment in China up by 11pct YoY in 4 months

Tuesday, 18 May 2010The government of China said foreign direct investment in China rose 11.3%YoY in the first four months of 2010 suggesting confidence in the world's third largest economy continued to grow.

The commerce ministry said foreign companies pumped in 30.8 billion dollars in direct investment in the country from January to April. It said in April alone, foreign investment increased 24.7% to 7.3 billion dollars.

The figure was up 7.7% in the first quarter from the same period in 2009, to 23.4 billion dollars.

The data includes investment by overseas companies in industries such as manufacturing, real estate and agriculture but excludes money put into banks and other financial institutions.

(Sourced from http://www.channelnewsasia.com)

So China performs $1.9 Trillion of new lending - and this is countered by 30.8 Billion of foreign investment in one quarter.

Apart from a calculator - am I missing something?

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