Fund manager heavyweights Hugh Hendry and Anthony Bolton have clashed on the outlook for China.
In an interview with Bloomberg Markets magazine, hedge fund specialist and Eclectica founder Hendry warned Japan is a ‘nuclear bomb' strapped to the global economy, while China could collapse by 2015.
In response, veteran investor Bolton, the manager of the Fidelity China Special Situations trust, acknowledges China faces challenges, but says these do not outweight the country's bull points.
Hendry is continuing to buy credit default swap protection on corporate bonds issued by Japanese industrial names as a play against China.
He believes the Chinese economy is threatened by softening export demand, falling asset prices, and wild speculation in the real estate market.
If Japanese corporate bond CDS spreads widen to equal or surpass their record highs of 2009, Hendry's fund could rise by as much as 50% percent, he believes.
"I see Japan as a nuclear bomb strapped onto the chest of the global economy. They have got uranium - which is, they sell credit protection: CDSs. I am the other side of that."
In October last year Hendry initiated a substantial short position in Japanese credit as a way of playing the "vulnerable" Chinese market.
He dismissed the idea the Chinese engine of growth is unstoppable, and looked to profit from taking protection on industrially cyclical Japanese corporate credit.
Speaking to Investment Week at the time, Hendry said: "I cannot argue with Japanese government bonds being priced where they are today, the country has to deal with endemic deflation. What I cannot agree with is credit near zero, the world is always risky," he added.
"I met the businesses where I have sought protection against their credit and it is tough to hear the current message. A lot of the companies are performing strongly; they are selling a lot of their products and are committing to more capital expenditure. However, these companies never invest at the bottom at the bottom of the cycle.
"In my opinion, the markets consistently seem to make the impossible a reality. At the moment the view is the China engine of growth is unstoppable.
"Because it is viewed as impossible, the trade is asymmetric. But I understand how much I can lose on the position and I am comfortable with this. However, if I am right, I will make a considerable amount of money."
Now Hendry's view on China has become even more downbeat, as he fears GDP growth in the the world's second largest economy is not matched by wealth creation at home.
His worst case scenario is that a plunge in Chinese stock prices and property values will be exacerbated by a softening demand for the country's exports, triggering an extended period of global deflation and slower growth.
Hendry's bets on Japan have a time horizon of between two and five years, indicating that he expects China to crash sometime before 2015.
However, Bolton says he is not concerned about Hendry's predictions, Bloomberg reports.
"I am not sure it is going to be all plain sailing in China," says Bolton. "Hugh Hendry is worried about the bad debts from local governments and bad debts from other areas and the fact that some of the infrastructure spend is going into projects that will not see a return for many years. These are all challenges, but I do not think they overweigh the bull points."
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