Some of the smartest hedge fund managers in the world have been predicting China’s economic implosion for some time.
"We are facing the largest macro imbalance in global history,” says Kyle Bass, founder of hedge fund Hayman Capital Management. He’s not alone. Jim Chanos, founder of Kynikos Associates and a short seller famous for spotting fraud early at Enron has spent years telling investors China’s economy is a "treadmill to hell."
Hedgeye Senior Macro analyst Darius Dale isn’t so sure. He explained why during a 125-slide presentation on HedgeyeTV. In contrast to dire warnings of some investors, Dale thinks China can manufacture a “soft landing,” but “by no means does that mean it will be a smooth landing.” In other words, it will be a long, protracted slowdown managed by the central government. There will be fits and starts along the way. Buyer beware.
In the video excerpt above, Dale explains why. Top on his list? The Chinese politburo’s willingness to pump massive amounts of money into its economy.
Some of the more shocking numbers:
- Fiscal Spending: The Chinese government’s has been running monthly budget deficits reaching into the hundreds of billions of dollars in the past year.
- Total Social Financing: China has expanded economy-wide financing by $2 trillion year-to-date.
- Central Bank Intervention: The People’s Bank of China has increased net liquidity to the financial sector by a staggering +2,022% year-to-date, to 1.06 trillion CNY.
Dale likens China to a raft with a hole in it.
“If the hole is getting bigger than the amount of air you have to pump into the raft over time increases just to keep it from sinking.” Here’s the question all investors should be asking themselves. “Do they keep doing this or do they say ‘Hey let’s take down the growth targets and target a more reasonable and sustainable level of growth,’” Dale asks. We think they’ll choose the former.
More to be revealed.
