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Fitch’s Charlene Chu Is the ‘Rock Star’ of Chinese Debt Analysis; At worst, Ms Chu predicts, a crisis is brewing. At best, China is at risk of a long, debt-laden economic slowdown.

August 22, 2013, 11:17 p.m. ET

Charlene Chu Is the ‘Rock Star’ of Chinese Debt Analysis

The Fitch Staffer Has Emerged as One of the Most Sought-after Experts on Chinese Finance

ALEX FRANGOS

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When top officials at the U.S. Federal Reserve want to understand the Chinese financial system, they meet Charlene Chu. Goldman SachsGS -0.74% which isn’t short of China experts, interviewed her and sent the transcript to its clients. And one of the world’s most influential investment firms calls her a rock star. From her cubicle in a Beijing office tower, Ms. Chu, who works for bond-rating firm Fitch Ratings, has emerged as one of the most sought-after experts on China’s increasingly risky financial system.“China is the classic story of corporate credit excess, but to an extreme,” says Ms. Chu. By Fitch’s measure, higher than the government’s, China’s private-sector debts rose from 129% of the size of the economy in 2008 to 214% at the end of June.

When China’s banking system seized up in June because of a central-bank-driven cash squeeze, her supporters said she had been predicting such an event for more than two years.

“If you read her stuff from one report to the next, the story gets deeper and murkier, an unfolding horror,” says Edward Chancellor, a strategist at GMO LLC, an investment firm that manages $108 billion. “As the Chinese banks have sunk, Charlene’s profile has risen.…We joke with her that she’s become a rock star,” he says.

Ms. Chu shined the spotlight on China’s shadow banking system, exposing vast amounts of unreported debt. She is credited by fellow China experts with spurring the country’s central bank in 2011 to expand its measure of debt in the economy to include lending done through shadow banks—though Ms. Chu says that, even now, not all such debt is included in official figures.

The People’s Bank of China didn’t respond to a request for comment.

“We are big fans of her work,” says James Chanos, one of the loudest negative voices on China. His hedge-fund firm, Kynikos Associates, started placing bets against China in 2009, when Ms. Chu was warning China’s debt-led stimulus program, designed to counter the global economic crisis, could build into a debt bubble.

Goldman Sachs sent a research report to clients this month titled “China Credit Concerns.” It featured a Q&A with Ms. Chu, on top of a list of articles by seven of Goldman’s China experts. Goldman wouldn’t comment.

When Federal Reserve Vice Chairwoman Janet Yellen and New York Fed President William Dudley visited China last year, they met with Beijing’s top financial brass—and squeezed in a breakfast with Ms. Chu, who worked at the New York Fed before Fitch, according to Mr. Dudley’s publicly disclosed schedules and people familiar with the meetings. A New York Fed spokesman declined to comment on the meetings. Mr. Dudley also met Ms. Chu in 2010.

Ms. Chu plays down the meetings. “I hate name dropping,” she says. Ms. Chu is an understated bearer of bad news, in contrast to outspoken critics such as Meredith Whitney and Nouriel Roubini, who made striking predictions ahead of the financial crisis that were trumpeted across media.

At worst, Mr. Chu predicts, a crisis is brewing. At best, China is at risk of a long, debt-laden economic slowdown.

Ms. Chu, 42 years old, was born in Denver to an American mother and a Chinese immigrant father who rose from a tea merchant’s son in Hunan province to become a general in Chiang Kai-shek’s Nationalist army.

When Mao Zedong’s Communists took over in 1949, her father, who has since died, fled to Hong Kong and later, at age 59, immigrated to America, where he worked as a hospital dishwasher. He met Ms. Chu’s mother, a former Franciscan nun who worked part-time jobs at department stores and as a telemarketer. “My father washed dishes until he was 81. I never met anyone who worked harder,” says Ms. Chu.

After a stint at McKinsey & Co., she went to China for the first time in 1997 and was surprised by the brooding, Communist-style architecture. “This is nothing like the country my father told me about,” she said.

Ms. Chu earned master’s degrees in international relations and business at Yale University, studying under economist Nicholas Lardy, an influential critic of China’s economic relationship with the U.S.

The New York Federal Reserve hired her in 2000 to watch China’s financial system and trained her to examine banks.

The timing was good. China’s banks, licking their wounds from a lending binge in the 1990s, were bailed out by Beijing in 2004 ahead of their high-profile IPOs. “I’ve never bought into the idea you carve out some bad loans, hand over some capital, list the banks, and suddenly everything is different,” she says.

Anxious to dig deeper into China’s banks and to learn more about her father’s family, she went to China without a job in 2005, and, the next year, Fitch, the third-biggest global ratings agency, hired her to monitor the banks.

Two years later, she learned about China’s nascent shadow banking sector when an executive at a midsize bank told her he was offloading loans by repackaging them and selling them to customers, calling them wealth-management products. She called the process “a perfect way both to extend credit above the government’s quota as well as to hide questionable loans,” she says.

She questioned whether the loans would stay off the banks’ balance sheets if they went bad, and she started to dig into the sector. By July 2010, shadow lending was soaring. There was a “pervasive understatement of credit growth and credit exposure,” she wrote in a widely cited report at the time that found China undercounted credit growth in the first half of the year by 28%, or 1.3 trillion yuan ($212 billion).

Six months later, she and her team of two analysts unearthed another 1.6 trillion yuan in unnoticed credit in the form of discounted bills and acceptances, arcane forms of credit swapped between companies and banks.

China’s central bank followed her lead in July 2011, publishing a broader “total social financing” figure that included many of the off-balance-sheet types of lending Ms. Chu identified.

The government’s new measure is an improvement, she says, but her estimate of total lending is still higher. And hers, she warns, is conservative.

Besides digging into China’s banks, Ms. Chu has been preparing a book about her family’s history in China. Not long after arriving, she located an 88-year-old cousin who wrote a memoir that chronicled rural life in China’s tumultuous 20th century.

“I hardly went out at all, and had no social life. It was the only way to balance the demands of my position at Fitch with writing the book,” she says. The book is done and she’s looking for a publisher.

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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 (www.heroinnovator.com), 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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