Meet the man who is betting against China; Muddy Waters’ Carson Block believes that China’s banks hold more toxic assets than Western peers did ahead of the 2008 financial crash

Meet the man who is betting against China

Carson Block, the founder of Muddy Waters Research, believes that China’s banks hold more toxic assets than Western peers did ahead of the 2008 financial crash .

Earlier this month, Mr Block caused shares in Standard Chartered to fall and the cost of insuring its debt to spike after he warned the emerging market-focused lender had more risk on its balance sheet than the market commonly believed and suggested that betting against the bank was a good way to profit from any Chinese downturn. Photo: Bloomberg

By Harry Wilson

10:00PM BST 18 May 2013

He is listened to by institutional investors, regulators and politicians but he rarely speaks publicly. Last week, his analysis of Standard Chartered’s exposure to China caused a tremble in its share price and its backers to leap to the bank’s defence. Carson Block has broken his silence this weekend to reveal his fears for the global economy. The secretive fund manager said the risks within China’s banking system are more severe than those in Western financial institutions before the crisis. Mr Block, founder of Muddy Waters Research, which has gained a reputation over the past three years for its in-depth reports on financial irregularities in scores of Chinese companies, said the country’s banks hold more toxic assets than their peers in the West did ahead of the 2008 financial crash. “We believe that the domestic Chinese banking system is a mess, with an enormous amount of bad loans, or loans waiting to go bad,” he told theSunday Telegraph.“The problems of China’s lenders are greater than those of the Western banks on the eve of the financial crisis, but because they are state-owned, the government will most likely print money and prop them up. This will of course have dire consequences for China’s economy though.”

He added: “Our view is that China is a massive asset bubble. This puts resource-based emerging market economies and Australia, Canada and New Zealand at direct risk. A China unwind will have significant knock-on effects in other developed markets too, likely implicating liquidity and asset prices. The severity of the effects in the rest of the developed world of course partly depend on the timing of the unwind.”

Earlier this month, Mr Block caused shares in Standard Chartered to fall and the cost of insuring its debt to spike after he warned the emerging market-focused lender had more risk on its balance sheet than the market commonly believed and suggested that betting against the bank was a good way to profit from any Chinese downturn.

Mr Block repeated his claims this weekend, explaining why his fund had decided to short the debt of a bank many believe to be one of the world’s safest and most profitable financial institutions.

“Our view is that Standard Chartered is overly focused on growth and perhaps was overly-emboldened by coming out of the financial crisis relatively unscathed. As usual when we take a short position, we also got the sense that investors and analysts weren’t asking hard enough questions of management. Our research painted the picture of a bank that is taking more risk than the market thinks.

“We don’t think Standard Chartered is as precariously positioned as Bank of America was in 2008, but we didn’t see it as being as solid a credit as JP Morgan presently is either – particularly because we don’t see Standard Chartered as being systemically important to any countries that can afford to bail it out.”

Executives at Standard Chartered last week spoke to investors and analysts in response to Mr Block’s comments. Senior managersare understood to have been angered by his intervention and have told shareholders they do not agree with the reasoning behind Mr Block’s view, arguing that the vast majority of lending is of durations of less than one year and is mostly to finance global trade with loans secured against solid assets.

The intervention of Muddy Waters in Standard Chartered has prompted a debate about the health of the bank, with many analysts coming to its defence. “I am a big fan of Muddy Waters’s work, their reports have been groundbreaking, but I think on Standard Chartered they have got it wrong,” said Ian Gordon at Investec Securities.

Others are less sure and agree with Mr Block’s view that Standard Chartered could be coming to the end of a decade-long run of record profits. “We are concerned with some of the loan concentrations and the types of business we have seen them writing,” said one senior London-based trader.

Muddy Waters is based in California and since being set up by Mr Block in 2010 has made its name exposing corrupt practices at small and medium-sized Chinese companies.

Its eight “strong sell” reports have been credited with wiping $7bn (£4.6bn) off the market values of the affected businesses, the delisting of four of the companies and at least six formal investigations by regulators.

Its most high-profile target has been Sino-Forest, a Canadian-listed Chinese lumber company, that in 2011 it accused of misrepresenting its timber holdings. The company at first disputed the claims, but after a fraud investigation by the Canadian securities regulator the business fell into administration, leading to shareholder lawsuits against the auditor, Ernst & Young.

Mr Block’s reports have not made him popular. Last year, he claimed to have been threatened by “tattooed gangsters” and has taken to keeping his location secret.

Going after a bank such as Standard Chartered marks a new approach for Mr Block, who has until now focused on relatively small, domestically-focused Chinese businesses.

Unlike previous campaigns, Muddy Waters has yet to make public its research on Standard Chartered to support its claims.

In conversations with stakeholders, Standard Chartered has dismissed the claim that it is under-provisioned as “rubbish”.

Mr Block admits it is “impossible” to know the quality of a bank’s loan book from the outside and adds that Standard Chartered’s leverage is not “excessive”.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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