STAFF NEWS & ANALYSIS
Hedge Fund Predicts China Disaster
By Staff News & Analysis - November 30, 2010

Hedge fund manager Mark Hart bets on China as the next 'enormous credit bubble' to burst. Mark Hart, an American hedge fund manager who has made millions predicting the crises in US sub-prime market and European debt, has launched a fund to bet on the imminent implosion of China. Mark Hart says complacency among market participants regarding China is eerily similar to the complacency exhibited prior to the United States sub-prime crisis and European sovereign debt crisis. Mr Hart, who runs Corriente Advisors from Fort Worth Texas, has told potential investors in a presentation that China is in the "late stages of an enormous credit bubble". When this bursts, the financier said he expects an "economic fall-out" that will be as "extraordinary as China's economic out-performance over the last decade". Asking for a minimum $1m (£640,000) stake, Corriente said it will use sovereign and corporate credit default swaps, interest rate and foreign exchange options to cash-in on the collapse. – UK Telegraph

Dominant Social Theme: Let's not talk about it …

Free-Market Analysis: The same day we published yet another (much disputed) article about China's raging inflation, we read this in the Telegraph (see article excerpt above). We agree with much that the Hart is suggesting, and we have mentioned a lot of it. What comes across clearly to us is that Hart has arrived at the same conclusions that we have.

There are some differences, and we want to point them out emphatically, however. We have NOT predicted, as Hart may be predicting, that a Chinese implosion could occur tomorrow, or the next day. It could of course (and we do believe now that the timeline has moved up) but Austrian analysis (which we try clumsily to practice) shows us quite clearly that the mechanism of the business cycle can be predicted but not the timeline.

Thus, we can conclude (and have) as Hart has concluded, that China is in the middle of a huge bubble. But we would NOT forecast a timeline as Hart seems to be doing by giving himself five years. We would tend to believe that a Chinese implosion would come in far less than five years at the rate that prices are accelerating; but, again, we believe timelines are not feasible.

It is interesting to us that we are reading more and more articles about a Chinese collapse, however. This need not be a power elite dominant social theme; it can simply be the recognition of a reality. On the other hand, central banking always leads to a business cycle, an exaggerated boom and eventfully a distinct crash. Since China's boom has been going on so long, it is reasonable to assume that the crash will be significant indeed.

Hart also points out the following: "The result is that, rather than being the 'key engine for global growth', China is an 'enormous tail-risk.'" Though he doesn't address the politics of it, we have pointed out in the past that a significant implosion in China would probably put the leadership itself at risk. We have pointed out as well that we believe the leadership's position is not at all secure, and that those who run the Chinese Communist Party are well aware of it. Courtesy of WikiLeaks, we now have additional documentation of this suspicion as follows:

China 'scared to death' of Pelosi … China was "scared to death" over a visit by US Speaker Nancy Pelosi, who is outspoken on human rights, and rejected her request to visit to Tibet, according to files leaked Monday. A top diplomat at the US embassy in Beijing said he asked China to consider letting Pelosi go to Tibet during her May 2009 visit to China, according to a cable obtained by whistleblower site WikiLeaks. Vice Foreign Minister He Yafei responded that China could not arrange the trip due to Pelosi's "tight schedule," according to the cable reprinted by Britain's Guardian newspaper. The Chinese ambassador in Kazakhstan was blunter, telling his US counterpart over an expansive dinner that Beijing was "fearful" over Pelosi's visit. – AFP

This does not sound like a ruling class with a great deal of confidence in our view. It sheds some light, we believe, on just how paranoid the CCP is. There are numerous trouble spots in China, and we believe price inflation is aggravating what is already a difficult situation. Authoritarian regimes are notoriously hard to implement over time – especially in a country as big as China – and this one has already lasted some 60 years.

We have also written that because of China's growing economic problems, the leadership may be more amenable to cooperation with the West, rather than less. WikiLeaks sheds light on this as well, showing us that China, apparently, is ready for the reunification of the Koreas. Of course such leaks may ratchet up the tension in that part of Asia, especially as North Korea sets for another succession, but according to US diplomats, that succession (if it does take place) may not last very long.

Wikileaks cables reveal China 'ready to abandon North Korea' … Leaked dispatches show Beijing is frustrated with military actions of 'spoiled child' and increasingly favours reunified Korea … South Korean war veterans protest after North Korea attacked Yeonpyeong Island. The WikiLeaks cables reveal Beijing believes such actions are those of a 'spoiled child'. … China has signalled its readiness to accept Korean reunification and is privately distancing itself from the North Korean regime, according to leaked US embassy cables that reveal senior Beijing figures regard their official ally as a "spoiled child". – Reuters

We have tried to analyze China in terms of its opposition to the West and to Western money power from the standpoint of one-world government. We have gone back and forth on the issue, and lately concluded that China may be more cooperative with the Anglo-American power elite at top levels than it appears to be. (The same goes for Russia, perhaps.) The above leaked cables certainly seem to show a Chinese leadership not only is not especially confident of its reign, but one that is seeking what the article calls, "trade and labour-export opportunities for Chinese companies," in a unified Korea.

After Thoughts

China's leaders are apparently focused on stability and economic growth. (We don't blame them.) It sounds less like China is looking for a war to solve its problems and more like China is looking around desperately to increase trade – as a remedy. Of course, from our point of view, no amount of increased trade – or any other kind of economic activity – is going to do much good in the long run. Inflation is always and everywhere a monetary phenomenon and cannot be addressed by economic activity per se. Sooner or later, China will suffer the consequences of its leaders' policies. We will see then if a military solution is to be considered.

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