Japan is not only paying for the consequences of China’s cheap-renminbi policy with its persistently high yen and pressures on its exporters.
It is also providing a neat back-channel for renowned China bears, Jim Chanos and Hugh Hendry, to short China in their own, highly distinctive ways.
As BusinessInsider notes on Monday:
Jim Chanos is understood to be betting on China’s downfall by shorting various resource companies whose fortunes depend on China. Hugh Hendry is also bearish on China, but has a diferent approach. He’s buying CDS on various Japanese companies.
In his latest note to investors, he provides this breakdown of his CDS portfolio, which notes the specific Japanese sectors he’s targeting. Note that Japanese steel is the big one.
While he is betting big on the collapse of China’s growth, Hendry famously told Bloomberg in January that he sees Japan as “a nuclear bomb strapped onto the chest of the global economy”.
“They’ve got uranium — which is, they sell credit protection: CDSs. I’m the other side of that.”
In that strategy, explored earlier on FT Alphaville, Hendry is using Japan to bet against China, buying up credit-default-swap protection on bonds issued by Japanese industrial companies such as JFE Holdings and Nippon Steel, which have benefited from China’s construction boom, and other stocks reliant on China’s continued economic growth.
He estimated in earlier interviews that if Japanese CDS spreads widen to equal or surpass their record highs of 2009, his fund could rise by as much as 50 per cent.
As the Bloomberg article pointed out, Japanese bank shares slumped in late 2010 to levels not seen since at least 1983, suggesting that Hendry is on to something.
But, as ContraryInvesting noted in mid-January, you “can’t talk about China without including Marc Faber’s take” (from the same Bloomberg story):
“It may be a painful adjustment, but in the near term there is no danger of an implosion in China,” says Marc Faber, the Hong Kong-based investment adviser and fund manager who publishes the Gloom, Boom & Doom report. “If I was negative about China and the credit implosion in China, I would short the Chinese banks.”
Not all big investors feel as sanguine, and if they continue to grow more nervous about China’s economic trajectory, a la GMO’s Jeremy Grantham, the ever-contrarian Hendry might find himself having to reassess his approach.
Although, by then, he may have shorted everything left to short.
Related links:
Hendry takes big bet on China crash – FT
Short China now! – FT Alphaville
Hugh Hendry would recommend you panic – YouTube