By Ambrose Evans-Pritchard at The Telegraph
Elite global banks have begun to warn clients that China's latest credit-driven boom is nearing its peak and will lose momentum by late summer, dashing hopes for a genuine cycle of fresh economic growth and commodity demand.
Morgan Stanley, Nomura, and Societe Generale have all issued cautionary notes just as amateur investors belatedly turn bullish again on China and start to pile into both commodities and emerging market equities.
"While the mini-recovery is likely to last another 3-4 months, our economists expect a renewed slowdown in the second half of the year, as stimulus efforts fade," said Morgan Stanley.
The US bank said record credit growth over the last quarter will keep growth humming for a little longer but the fiscal blitz is already ebbing and the government is imposing property curbs in the Eastern cities to prevent a speculative bubble.
China's reflation drive has been explosive. New home sales jumped 64pc in March from a year earlier. House prices have risen 28pc in Beijing, 30pc in Shanghai, and 63pc in the commercial hub of Shenzhen. The rush to buy has spread to the Tier 2 cities such as Hefei - up 9pc in a single month.
"The housing market is on fire," said Wei Yao, from Societe Generale. "In the first quarter, increases in total credit exploded to 7.5 trilion yuan, up 58pc year-on-year. There is no bigger policy lever than this kind of credit injection."
"This looks like an old-styled credit-backed investment-driven recovery, which bears an uncanny resemblance to the beginning of the“four trillion stimulus” package in 2009. The consequence of that stimulus was inflation, asset bubbles and excess capacity. We still think that this recovery will not last very long," she said.
The signs of excess are visible everywhere as the Communist Party once again throws caution to the wind . Cement production jumped 24pc in March and infrastructure investment rose 19pc.
Yang Zhao from Nomura said the edifice is becoming more dangerously unstable with each of these stop-go mini-booms. "Structural problems and financial imbalances are worsening. We believe this debt-fueled growth is not sustainable," he said.
Nomura said the law of diminishing returns is setting in as the economy nears credit exhaustion. The 'incremental credit-output ratio" has deteriorated to 5.0 from 2.3 in 2008. Loans are losing traction and the quality of investment is falling.
"Be careful. We are nearing the point where things are as good as they get for the first half of 2016. We recommend taking some money off the table," said Wendy Liu and Vicky Fung, the bank's equity strategists.
Despite the stimulus, defaults among private companies and state entities (SOEs) have jumped to 11 so far this year from 17 last year, and the defaults are getting bigger. China Railway Materials has just suspended trading on $2.6bn of debt.
Michelle Lam from Lombard Street Research said Beijing has has retreated from reform and resorted to pump-priming again. "This may last for one or two quarters. But how much longer can Beijing go on creating debt at a breakneck pace?" she said.
Capital Economics says there has typically been a lag of six to nine months after each burst of credit, suggesting that economic growth will roll over in the late Autumn. Markets do not move in lockstep, and may anticipate this.
The mini-boom has caught hedge funds and Western asset managers on the wrong side of some very large trades. The fiscal and monetary stimulus began in the second half of last year and has been building towards a climax ever since - with an accelerating growth of the money supply that invariably precedes a burst of growth - yet some funds continued to bet on the narrative that China was hurtling towards imminent crisis. They played the "short China" trade through proxies such as the Australian dollar or commodity futures.
The most spectacular casualty has been Crispin Odey. His flagship European Fund has lost 31pc so far this year, following a painful streak for his stable of funds late last year.
He called the end of the global cycle as far back as January 2015, eyeing the greatest "shorting opportunity" since the Lehman crisis. "We used all our monetary firepower to avoid the first downturn in 2007-09, so we are really at a dangerous point to try to counter the effects of a slowing China," he said.
While 2015 was indeed a wild year in China, he misjudged the ability of the authorities to keep the game going, and missed the early warning signals of a monetary rebound.
Kyle Bass from Hayman Capital, who won the jackpot shorting US subprime debt, has had less luck venturing into the complexities of Asia. He bet prematurely on bond meltdown in Japan, later admitting that he was "dead wrong".
He has since bet on a 30pc yuan devaluation of the Chinese yuan, warning last September that the country faces a banking crisis five times larger than the subprime failures, with over $3 trillion of losses. The yuan has risen against the dollar so far this year.
Financier George Soros has issued his own such warnings, noting an "eerie resemblance" between China's bubble and the build-up to the Lehman crisis. "China re-lit the furnaces. Stimulus can buy you additional time but it makes the problem that much bigger," he said.
Yet Mr Soros cautioned on timing, noting that the US bubble went on for two years after it was already clear to many that trouble was coming. "Since it feeds on itself, it can reach the turning point later than anybody expects," he said.
Crispin Odey and other wounded China bears may eventually reap their reward, but first they must weather a short-term boom that is playing havoc with their positions. It is a cardinal sin in the hedge fund world to jump the gun.