This arti­cle is a guest con­tri­bu­tion by Court­ney Com­stock, The Busi­ness Insider.

Hedge fund man­ager Hugh Hendry, of Eclet­ica, says that right now, China looks a lot like Japan did in the 1920s.

“There are strik­ing par­al­lels with Japan in the 1920s, when ulti­mately the whole sys­tem col­lapsed,” Hendry told Bloomberg. “China could pre­cip­i­tate a much greater cri­sis else­where in the world.”

Japan­ese credit built inven­tory dur­ing and after World War I and then later, in the 1920s, Japan’s export boom col­lapsed amid excess global capac­ity. Japan's growth was dec­i­mated and soon after, a stock-market crash and bank runs followed.

(China has also been com­pared to Japan in the 1980s.)

Hendry thinks China is now in the same boat.

“China’s at the mercy of a credit bub­ble,” he said. “Once you’ve unleashed the genie it’s out there. They are ulti­mately unsta­ble and it’s that insta­bil­ity that cre­ates their demise.”

So Hendry’s main fund, Eclec­tica Fund (global macro), used 1.5% of its asset value (the fund has ~$180 mil­lion in assets), $2.7 mil­lion to buy options on 20 com­pa­nies in inter­na­tional mar­kets that will profit from “a dra­matic col­lapse” of China’s growth. If China’s econ­omy col­lapses, the fund could make $500 million.

The wait until China’s bub­ble bursts could be less than a year or it may take three years, as Cit­i­group Inc. econ­o­mists Willem Buiter and Shen Ming­gao esti­mate, Hendry said.

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