The bust of Aussie boom-towns, collapse of the mining industry, dramatic capital outflows, and a bursting housing bubble all have one thing in common, according to billionaire hedge fund manager Crispin Odey - "China is everything to Australia in lots of ways." Simply put, he tells The Australian Financial Review, economies dependent on China for income, including Australia, are headed for recession and central banks will not be able to able to come to the rescue because they have exhausted the arsenal of policy weapons. "We've got a very old-fashioned recession which is spreading across the world," and Australian banks face a tough time ahead too because there are indications bad debt risks are rising.
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One of the world's leading hedge fund managers has warned that economies dependent on China for income, including Australia, are headed for recession and central banks will not be able to able to come to the rescue because they have exhausted the arsenal of policy weapons.
Crispin Odey, who is the founder of London-based Odey Asset Management, has taken a number of short positions on Australia since adopting a bearish view of China's growth outlook.
He is short stocks Genworth Mortgage Insurance Australia and Fortescue Metals Group, indicating that he expects the share prices to fall, and he believes the Australian dollar is headed for further losses. He said Australia's banks could have a "bad time time ahead of them".
"China is everything to Australia in lots of ways," Mr Odey told The Australian Financial Review.
The world's second-largest economy was eroding its competitiveness and its capital accounts were vulnerable to outflows as Chinese policy becomes more accommodative. "We've got a very old-fashioned recession which is spreading across the world."
The first impact was the hit to income, followed by the decline in capital expenditure and rising unemployment. All three trends are already evident and have prompted the Reserve Bank of Australia to cut interest rates to a record low 2.25 per cent this year. Australian banks faced a tough time ahead too because of indications bad debt risks would rise.
"The only thing you can do in those countries as you're seeing in Australia is you're cutting interest rates," Mr Odey observed.
"Frankly, it's a demand problem."
This is complicated by the prevalence of quantitative easing (QE), or large monetary stimulus, elsewhere in the world which has pushed share prices to record highs in spite of worsening economic conditions in many economies outside of the United States. The competing forces of QE and the threat of recession could set up a crash as "we're in the midst of a wonderful bubble".
Mr Odey is one of several high-profile hedge fund managers to bet on Australia running out of luck.
Jim Chanos, one of of the world's largest short-sellers and a prominent China bear, has shorted shares Fortescue Metals and several local other iron ore and coal miners, a position he confirmed last year.
George Soros' Soros Funds Management is also understood to have considered betting on a downturn by shorting mining services companies while in April 2010 Jeremy Grantham of GMO branded Australia's property market a bubble, sparking interest in shorting Australia's banks that has remained ever since.
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