Hedge fund bears are circling the China market, with sceptical managers predicting that 2014 could be the year that will see a reckoning in the world’s second-biggest economy.
A mainland stock rally at the end of 2013 has failed to sustain momentum early into the new year, dampening optimism that one of last year's worst-performing equity markets could be on a path to recovery.
Combined with a tightening of domestic credit and an expected start to tapering of US Federal Reserve bond purchases this year, China pessimists are predicting a levelling of the mainland market.
They cite the unsustainability of continued post-crisis growth, which has been underpinned by easy credit.
Industry veteran George Soros is the latest to join the choir of China bears, which also include Carson Block of Muddy Waters Research, Kyle Bass of Hayman Capital and Jim Chanos of Kynikos Associates.
Tiburon Partners, a London-based, Asia-focused boutique asset manager running $500 million in AUM, is also taking a negative bet on China in its Asia long/short fund.
“Everything that seems to be related to China seems to be weakening, whether you’re looking at A-shares, railway bonds, iron ore, copper or commodity [country] currencies," says Tiburon fund manager Stewart Paterson. "Everything is giving a price signal that this is starting to unravel now.”
The China market rally that followed the Third Plenum in November “was taken positively, but for the wrong reasons”, argues Paterson, who manages Tiburon Taurus, a macro-driven Asia ex-Japan long/short equity strategy.
“What was outlined and insinuated at the plenum was very positive in the sense that it underlined... that the Chinese authorities recognise the seriousness of the problems that they face,” he tells AsianInvestor.
“What the authorities were saying is, ‘Yes, we’ve got a massive problem’. And therefore I see that as very bearish, if anything, under a three- to five-year view.”
He sees potential investment opportunities through the short-selling of China financial, property and materials-related stocks.
Australia, which has been a chief commodities exporter to China, will be “in for a very rough time” if the mainland economy unravels, says Paterson. “There are selective commodity stocks in iron ore and steel in Australia, and everywhere else in the region, which I feel have the potential to fall a very long way.”
Aside from Australia, Indonesia is also vulnerable to a “China disaster scenario”, given it is a large commodity producer with a current account deficit, he says.
“India will suffer as emerging market risk is re-priced and investors are forced to liquidate positions,” adds Paterson.
Meanwhile, a Soros-penned opinion piece for Project Syndicate released early this month has piqued interest among market-watchers, with some interpreting his commentary as a China short-selling idea.
“The major growth model responsible for [China’s] rapid rise has run out of steam,” says Soros. He notes that the debt undertaken to fuel the country's economic expansion has created a “Chinese conundrum which will come to a head in the next few years".