There is a good article just published in CFA Magazine entitled China: Unhedged Risk in Your Portfolio? Joel Hirsh, CFA, reinforces many of the points we made about China in our latest Macroeconomic Update. Some highlights:
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“Chinese government agency estimates suggest China has accumulated bad loans to local governments totaling more than 15 percent of GDP.”
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“Chinese central government statements, rating agency reports, as well as third-party analysis suggest China’s banking system is in a highly precarious position, with a reasonable probability of being insolvent.”
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”Fixed investment (such as construction spending funded by a bank loan) represents 60 percent of annual GDP. This level of investmentfueled growth has never been successfully sustained.”
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”The most effective way to hedge the threat of a Chinese slowdown is through the external link to China’s economy—imported commodities.”
With China’s predicament, short positions in commodities like copper, iron ore, and metallurgical coal and their miners provide a good hedge for long positions in gold and silver and related miners. The latter are key to protecting against global money printing and debt devaluation. There is potential for alpha generation on both sides.
See full article here: http://viewer.zmags.com/publication/761a93ac?page=12#/761a93ac/12
Posted November 3, 2011 by Kevin S. under China Real Estate Bubble, Global Fiat Currency Crisis