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Analyzing Bullish and Bearish Views on China

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May. 20 2016, Updated 4:42 a.m. ET

More marginal debt

Hedge fund managers had mixed opinions about China at the SALT (SkyBridge Alternatives) Conference. The conference ended on May 13. Some of the managers thought that the issue in China has been overemphasized. They think that China can make a comeback from this financial mess. Some of the managers thought that China is experiencing a hard landing due to the high debt burden. They stated that China is far from a revival.

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Bearish views

J. Kyle Bass is the founder of Hayman Capital Management. He’s bearish on China (FXI) (YINN) (ASHR). He said, “China’s economy was already experiencing a hard landing, creating one of the biggest macro imbalances the world has ever seen.” Earlier, he described China’s debt as a “ticking time bomb.” Currently, China’s total debt-to-GDP (gross domestic product) ratio is 240%–270%. It was 150% a decade ago. China’s debt, as a percentage of the GDP, is larger than the US or Germany.

Bass also stated that Hong Kong is feeling the heat due to a slowdown in China. Hong Kong’s property prices have declined. Its property market is experiencing a free fall. He stated at the 2016 SALT Conference that “Hong Kong’s in a worse position than it was in prior to the ’97 crisis today.” Credit soared “recklessly” in Asian countries—particularly in Malaysia and Thailand.

Meanwhile, the IMF (International Monetary Fund) warned that China’s economic rebalancing efforts could impact neighboring countries—particularly South Korea and Taiwan. The demand for imports from those countries would drop. According to the IMF’s latest regional economic outlook report, “for every 1% decline in Chinese economic growth, other Asian countries will see a 0.15% to 0.30% fall in the short term.”

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Most of the other managers agreed with Bass. Ken Tropin is the founder of Graham Capital Management. He said, “it may be a little slower than Kyle thinks.” He expressed his concern regarding speculation in commodity prices (CEO) (SNP) (PTR), which is driven by retail investors. It might lead to another stock market crash. Recently, Chinese exchanges increased transaction fees and margin requirements on future contracts to curb speculative trading in commodities.

Paul Brewer is the CIO of Rubicon Fund Management. He thought that China’s economic problems are worse than the US credit crisis of 2008.

Bullish views

Roslyn Zhang is a managing director at China Investment Corporation. She was defensive about China. She thought that most of the hedge fund managers have a “herd mentality.” This is generally seen in Chinese retail investors. At the 2016 SALT Conference on May 11, she said that “People are worried about China…GDP crossed $1 trillion in 1998, doubling in six years. The average GDP rate then was 12%. Post financial crisis growth has slowed down. But if you do the math, from 1992 to 1998, the growth is less than $100 billion. Now, the dollar term growth each year is $1 trillion, even though people are worried. If you are worried about China’s growth rate, you should be twice as worried about the economy growing here.” According to Zhang, concerns about China’s economic growth are overblown.

Similarly, Leon Cooperman of Omega Advisors was more optimistic about China’s prospects. He thinks that China’s issues have been overemphasized. Don Brownstein of Structured Portfolio Management thinks that a communist government is a better fit for capital allocation. He said, “China came out of a huge, huge mess and it is a huge country with a very, very diverse population. I would rather put my money with a communist government than a capitalist government.”

In the next part, we’ll try to reconcile hedge fund managers’ view from our view point.

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