Analysts Question China's Economy

U.K.-based hedge fund managers are increasingly questioning the real depth of problems with the Chinese economy as details of potentially serious risks are emerging from the examination of sovereign and corporate credit default swaps, interest rate and foreign exchange options. A trend to look at shorting China is developing as unease begins to spread about the extent of Chinas sovereign debt and the development of a massive bubble economy.

The data doesnt add up, the London-based Daily Telegraph quoted one manager saying. We think weve experienced credit bubbles over the past few years, but China is the biggest. And yet the global economy is looking to China as not just a crutch but a springboard out of the recession. Its crazy.

Hedge funds especially tend to have exposure to greater risks and accordingly have very keen analytical skills as a result. However more of them are now turning to viewing China not as a burgeoning economy sustaining world growth, but as a potentially massive trouble spot.

Mark Hart of Corriente Advisors, famous for being the American hedge fund manager who made millions of dollars predicting both the subprime crisis and the European sovereign debt crisis, has started a fund based on the belief that rather than being the key engine for global growth, China is an enormous tail-risk. Hugh Hendry, former star of Odey Asset Management, also launched a distressed China fund at Eclectica Asset Management.

Other analysts are also becoming bearish. Lombard Street Research published a warning of Chinas already dangerously home-grown inflation, while a recent study by Fitch concluded that if Chinas economic growth falls to 5 percent this year, rather than the expected 10 percent, global commodity prices would plunge by as much as 20 percent. China is the global price-setter for oil, coal and base metals.

Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of distress China funds is a sign to sit up, one economist told the Telegraph.

Similarly, Corriente Advisors stated: We expect the economic fallout from a slowdown of Chinas unsustainable levels of credit and growth to be as extraordinary as Chinas economic outperformance over the past decade. The financiers arguments center on the belief that Chinas demand is not real but manufactured by the state.