"The data doesn't add up," the London-based Daily Telegraph quoted one manager saying. "We think we've 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. It's 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 China's "already dangerously home-grown inflation," while a recent study by Fitch concluded that if China's 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 China's unsustainable levels of credit and growth to be as extraordinary as China's economic outperformance over the past decade." The financiers' arguments center on the belief that China's demand is not real but manufactured by the state.
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