The View | China is changing in a way that will soon make us forget about the old economy

There is an expression in investment circles that no one qualifies as a macro-trader until they have lost money shorting the Japanese bond market. The trade never worked even though it seemed obvious that Japan, with it combo of massive debt and anaemic growth, was heading for a bond market meltdown.

Given that definition, Kyle Bass, the Texas hedge fund manager, qualifies as a bona fide macro trader. He long predicted doom for Japanese bonds, a call that clearly didn’t reap him the gazillions he made with his bearish bets on US housing and euro-area debt.

Now his big bear call is Chinese banks. Will Bass make another killing, or will China turn out like Japan – an obvious disaster that is somehow always deferred?

The origin of China’s debt crisis has been endlessly dissected. After two decades of a rapid and stunning industrial build-out, the country became overly dependent on investment for growth, but was moving to correct those imbalances. Then the Global Financial Crisis hit and the leadership panicked. A massive credit expansion ensued, the type that history shows almost always ends in a financial sector crisis.

Yet strangely, betting on a financial crisis almost assumes China will do the right thing. Last year, for instance, Joyce Poon at Gavekal Dragonomics was hoping that Beijing would just face up to reality and write off bad debt, then start to rebuild by selling off state assets. Large-scale privatisation could then produce a burst of productivity gains and set China on a new path.

In recent research, however, Poon said she’d given up hope on radical policy solutions like this. Instead she expects Beijing to take the muddle-through approach, putting out fires in the sector as necessary.

Meanwhile, the property bubble and the debt-to-GDP ratio continue to inflate. This could set China for an even greater fall.