Mark Hart III is chairman and chief investment officer of Corriente Advisors, which he formed in 2001. Corriente advises the Corriente Master Fund, a global macro hedge fund, the European Divergence Funds, which were formed to capitalize on rising European sovereign credit spreads, and the Corriente China Opportunity Funds, which are designed to profit from a slowdown in China. Hart also launched and co-managed the Subprime Credit Strategies Funds from 2006 to 2008 with Kyle Bass, which were formed to capitalize on the subprime mortgage market dislocation. Hart earned a B.A. in the Plan II Honors Program from the University of Texas at Austin in 1994.
From his talk:
The topic was China, which has been the recipient of tons of foreign investments. To do this it has printed tons of money to prevent the yuan from appreciating. The continuing growth of China is the biggest story of the global recovery.
Many people say the Chinese government will not allow the Chinese economy to collapse.
Through many conversations with analysts, colleagues, etc., he thinks the economy is dangerously overheating.
He said there were four misconceptions about China (I think he did not get to the fourth).
Misconception #1 China is an economic miracle. The reality is that it is a credit fueled bubble. M2 money supply stands at $12 trillion now which is far above the level of the U.S. economy. Signs of a bubble are everywhere. China has been following other emerging market booms in that the boom is fixed asset investments. What makes China unique is that China’s boom has lasted for 12 years and fixed income assets are 60% of GDP, which is unprecedented level.
The Chinese government creates the whole local lending process.
On the surface, Chinese banks look healthy. Servicing these loans depends on property sales mostly. The Chinese banks are extremely undercapitalized.
Right now non-performing loans make up 30% of China’s assets according to KPMG.
The Chinese government is starting to take measures. However, inflation is much worse than the headline numbers.
Misconception# 2 FX reserves=savings. The reality is that FX reserves=moneytary base+debt.
China has been printing money when foreign money comes in.
The M2 number compared to reserves is even worse than most Asian economies pre-Asian crisis in 1998. China is at 25% compared to average of 28% of the average economy that suffered as a result of the Asian crisis.
Misconception #3 Yuan must appreciate. The reality is that devaluation is the path of least resistance. There has been tremendous pressure to appreciate the yuan. People think that foreign money will keep flowing in. However, once the music stops the party is over.
I am long puts on the Chinese yuan. These puts trade at 3.8%; this trade is not crowded at all.
There are a lot of ways to play China, but this seems the best way.
Disclosure: None
http://www.valuewalk.com/
From his talk:
The topic was China, which has been the recipient of tons of foreign investments. To do this it has printed tons of money to prevent the yuan from appreciating. The continuing growth of China is the biggest story of the global recovery.
Many people say the Chinese government will not allow the Chinese economy to collapse.
Through many conversations with analysts, colleagues, etc., he thinks the economy is dangerously overheating.
He said there were four misconceptions about China (I think he did not get to the fourth).
Misconception #1 China is an economic miracle. The reality is that it is a credit fueled bubble. M2 money supply stands at $12 trillion now which is far above the level of the U.S. economy. Signs of a bubble are everywhere. China has been following other emerging market booms in that the boom is fixed asset investments. What makes China unique is that China’s boom has lasted for 12 years and fixed income assets are 60% of GDP, which is unprecedented level.
The Chinese government creates the whole local lending process.
On the surface, Chinese banks look healthy. Servicing these loans depends on property sales mostly. The Chinese banks are extremely undercapitalized.
Right now non-performing loans make up 30% of China’s assets according to KPMG.
The Chinese government is starting to take measures. However, inflation is much worse than the headline numbers.
Misconception# 2 FX reserves=savings. The reality is that FX reserves=moneytary base+debt.
China has been printing money when foreign money comes in.
The M2 number compared to reserves is even worse than most Asian economies pre-Asian crisis in 1998. China is at 25% compared to average of 28% of the average economy that suffered as a result of the Asian crisis.
Misconception #3 Yuan must appreciate. The reality is that devaluation is the path of least resistance. There has been tremendous pressure to appreciate the yuan. People think that foreign money will keep flowing in. However, once the music stops the party is over.
I am long puts on the Chinese yuan. These puts trade at 3.8%; this trade is not crowded at all.
There are a lot of ways to play China, but this seems the best way.
Disclosure: None
http://www.valuewalk.com/
