Tuesday, May 24, 2011

China seen as the candidate for 'next catastrophe' -- is the China bubble about to burst?

Beware the China bubble because until hedge funds have found a way of directly shorting the soaring economy it will remain unchecked, says Greg Zuckerman, author of The Greatest Trade Ever.

Mr Zuckerman's book was one of the first to reveal the billions in profits which hedge funds and banks from taking bets against the sub-prime market just before the housing bubble burst.

China, where the economy has expanded 10.1pc a year on average since 1978, is reminiscent of the housing market before credit default swaps allowed hedge funds to make bets against the entire market, according to Mr Zuckerman.

When China's growth will decelerate or come to an abrupt stop is probably the most critical question facing the world economy. But predictions of a hard landing on everything from bad loans to investment-led overheating or inflation has yet to derail the country's expansion.

This is because the government-controlled economy is insulated from speculators testing the true voracity of the market, claims Mr Zuckerman. "We need short sellers," he said.

"The problem with the housing bubble was that for a long time people couldn't bet against it. Credit default swaps gave hedge funds specific tools to short the entire market. That pricked the housing bubble." (read more)