(Bloomberg) -- Carson Block said he will continue wagering against Hong Kong-listed companies on the view that a pullback in credit will send shock waves through the economy.
Block, the founder of Muddy Waters LLC, said in an interview that China’s credit problems since the global financial crisis will reach a breaking point. He blames this on Chinese officials cramming liquidity into the banking system, which allowed other players to pull their cash out, leaving the system increasingly vulnerable to collapse, he said.
"At some point, your past sins catch up with you," Block said in an interview on Bloomberg Television. "Ultimately, there will be a day of reckoning, and I know that. I just can’t tell you if that’s in two months, two years or 20 years."
The renowned short-seller’s comments come after Muddy Waters published a report in mid-December alleging China Huishan Dairy Holdings Co., a dairy-farm operator, was “worth close to zero.” The company lost all but two of its directors last month and is now fighting for its survival after its stock sank 85 percent in March.
Sino-Forest Corp. lost more than two-thirds of its market value in two days after Block first criticized the company in 2011, while Focus Media Holding Ltd. fell as much as 66 percent in one day that same year. NQ Mobile Inc. sank the most on record after the short seller targeted the company in 2013.
Block’s firm had also previously shorted Noble Group Ltd., the Hong Kong-based commodity trader that’s grappled with losses, credit downgrades and a rout in bonds and shares. Block said in the Bloomberg Television interview that he doesn’t have any short positions on Noble Group now, although the company will almost certainly have to undergo a restructuring.
Block said the challenge to shorting Chinese shares is weeding out companies with government support that "just won’t be allowed to fail." For that reason, he says betting on declines in Hong Kong’s Hang Seng Index is too simplistic. The key is finding industries and companies that will eventually crack regardless of what Chinese authorities do.
The U.S. government “has the most power in the world to avert a major economic catastrophe,” he said. “So if they weren’t able to do it, it’s because the laws of economics, the physics of economics, eventually catch up.”