Some of the smartest hedge fund managers in the world are predicting China’s crash.
"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 said China’s economy is on a "treadmill to hell."
There are a number of reasons for alarm. For one thing, China has added about $24 trillion-worth of debt since 2007. That's about as much as the combined debt of the U.S. and Europe in the lead up to the financial crisis. In other words, China's economy is running hot.
If you're looking for nuanced ways to play the coming China crash, here are two to consider: Australian and Canadian banks.
"The banking systems in these countries are enormous relative to their GDP," according to Hedgeye Financials analyst Josh Steiner. As you can see in the chart below, assets at Canada and Australia's top four banks are two times their Gross Domestic Product. In the U.S.? Bank assets are just 0.44 times GDP.
so Why does it matter?
Chinese foreign buyers have created frothy dislocations in Australian and Canadian real estate markets. And hence its banks. According to Steiner, it's a three-pronged problem:
- Chinese buyers have been loading up on real estate in both countries.
- Mortgage credit pools make up more than two-thirds of Australian and Canadian bank's total balance sheet.
- Regulators are pushing back on foreign buyers.
Here are a few stats Steiner cited on a recent edition of The Macro Show:
- The value of new construction apartment sales in Australia totaled $30 billion. Chinese buyers made up 83% of that, or $25 billion.
- Vancouver home sales are -33% year-over-year following the British Columbian government's tax on foreign buyers of 15%.
- The number of residential operating cranes in Australia's nine largest cities is up 165% to 525 this year (through the second quarter). In twelve of North America's largest cities, that number is 194.
Bottom Line:
As China's economy continues to cool, the Australian and Canadian banks could come under fire.
* * * *
