Mar. 19 – James Rickards, the former general counsel of hedge fund Long Term Capital Management, gave a gloomy verdict of the Chinese economy at the Asset Allocation Asia Summit in Hong Kong this week, but it remains to be seen whether his outlook is the right one.

“China is in the midst of the greatest bubble in history,” Rickards said, further commenting that the Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, China’s national currency. “As I see it, it is the greatest bubble in history with the most massive misallocation of wealth. It is a bubble waiting to burst.”

In contrast, HSBC Holdings CEO Michael Geoghegan disagreed, stating “People making comments about bubbles possibly don’t have all the facts. Regulators are in control of the banking industry, and have the ability to curb lending as needed.”

In discussing investment prospects among the BRIC group, Rickards stated Russia and China didn’t deserve any investment except for short-term speculation citing concerns with balance sheets, resource allocation, stock market performance, and human rights records within the two countries. He went on to dispute arguments that China could hold the United States hostage through its holding of Treasury assets, arguing that China would suffer massive losses if they dumped their holdings.

China has been slowly cutting back their accrued holdings of U.S. debt over the last three months, but remains the largest foreign owner of Treasury holdings with US$889 billion.

HSBC’s Geoghegan countered, saying that China’s banking industry has “very low impairment charges compared to what you’d expect this time in the cycle. I wouldn’t be surprised if there’s a gradual increase in impairments, but long term, I’m confident that the structure of the banking industry is very, very sound.”

Mr. Rickards described India and Brazil as examples of “real economies” in the developing world.