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Hedge fund manager Hugh Hendry, of Ecletica, says that right now, China looks a lot like Japan did in the 1920s.”There are striking parallels with Japan in the 1920s, when ultimately the whole system collapsed,” Hendry told Bloomberg. “China could precipitate a much greater crisis elsewhere in the world.”
Japanese credit built inventory during and after World War I and then later, in the 1920s, Japan’s export boom collapsed amid excess global capacity. Japan’s growth was decimated and soon after, a stock-market crash and bank runs followed.
(China has also been compared to Japan in the 1980s.)
Hendry thinks China is now in the same boat.
“China’s at the mercy of a credit bubble,” he said. “Once you’ve unleashed the genie it’s out there. They are ultimately unstable and it’s that instability that creates their demise.”
So Hendry’s main fund, Eclectica Fund (global macro), used 1.5% of its asset value (the fund has ~$180 million in assets), $2.7 million to buy options on 20 companies in international markets that will profit from “a dramatic collapse” of China’s growth. If China’s economy collapses, the fund could make $500 million.
The wait until China’s bubble bursts could be less than a year or it may take three years, as Citigroup Inc. economists Willem Buiter and Shen Minggao estimate, Hendry said.