Summary of Hedge Fund Bearish China Thesis: Kynikos, Corriente, Pivot, Eclectica, Greenlight & More ~ market folly

Tuesday, June 26, 2012

Summary of Hedge Fund Bearish China Thesis: Kynikos, Corriente, Pivot, Eclectica, Greenlight & More

Today we're posting up a .pdf entitled "Global Macro Hedge Funds: Emerging Perspectives on China."  It essentially outlines the bearish China thesis held by numerous well known hedge funds.

The research summarizes viewpoints from the following managers and we've extracted some of the perspectives below.

Jim Chanos' Kynikos Associates: "Chanos cites several factors which he considers to be predictive of (a collapse of the Chinese economy), including the country's economic dependence on new construction, which accounts for 60% of China's economy (versus 10-15% in western nations) and which is fueling demand globally for industrial commodities, particularly in Australia, Brazil and Canada.  Mr. Chanos has stated that China's reliance on property development to produce nearly the entirety of the country's economic growth, rather than appreciable growth in exports and domestic demand, is without historical precedent and is ultimately unsustainable."

We've recently posted Chanos' bearish view on China and have called attention to his short of Fortescue Metals in Australia.  And then longtime readers will recall we posted Chanos' hour long presentation on China back in 2010.

Mark Hart's Corriente Advisors: "Mr. Hart has publicly stated his assessment, based upon his team's research, that China is generally misperceived (and therefore mispriced) as a perpetual 'economic miracle,' when in fact the reality is that the country's economy is a credit-fueled bubble."

At last year's Ira Sohn Conference, we posted some notes from Hart's talk on China.

Hugh Hendry's Eclectica Asset Management: "Mr. Hendry identifies parallels between the present situation in China and that of Japan in the 1920s when economic imbalances ultimately caused the entire system to collapse and foresees 'a dramatic collapse' of the Chinese economy as the inevitable result of the inherent instability resulting from massive debt growth to fund infrastructure projects which is 'unprecedented in 400 years of economic history' in conjunction with a structurally flawed political economy in which gross domestic product growth is not matched by domestic wealth creation."

You can read about Hendry's Asian bear portfolio he constructed.

Pivot Capital Management: "Three principal reasons for their perspective on China's pending economic downturn: 1.  China's expansion cycle has already greatly surpassed all prior global capital investment cycles; 2. Recent economic growth is not sustainable and is predominantly the result of massive fiscal stimulus, concomitant with a surge in the growth of credit, none of which is sustainable; and 3. China has substantial overcapacity in virtually every industrial manufacturing and infrastructure sector, causing declining marginal returns on investment."

David Einhorn's Greenlight Capital: At the Ira Sohn Conference this year, "Mr. Einhorn presented a markedly negative perspective on China, stating that China is misunderstood and is not an investment opportunity.  He stated that capital flight has already started and that money is leaving the country, noting the slowdown in export growth and how inflation has tempered the influx of hot money."

Embedded below is the complete summary of hedge funds' bearish China thesis in a 44-page comprehensive document:  

For more hedge fund views on China, we've highlighted the debate between Xerion's Dan Arbess and Jim Chanos in China: bubble or bonanza?

We've also posted previous resources such as Vitaliy Katsenelson on China: the mother of all black swans.

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