Betting against China

George Soros has made a massive call…he is betting against China.

George Soros probably shouldn’t expect any warm invitations to Beijing – not with the much-reviled short seller warning of a giant Chinese crash.

The billionaire first shook a major government in September 1992, when he led an attack on the British pound. For his role in humiliating London and forcing John Major’s government to exit the European exchange-rate mechanism – essentially the euro – Soros reportedly netted $US2 billion.

Soros made a bundle off America’s subprime debt crisis as well. Here in Asia, his legend has loomed large since 1997, when then-Malaysian Prime Minister Mahathir Mohamad accused him, bizarrely, of heading a Jewish conspiracy to spark an Asian crisis.

Now Soros has his eye on China. In a January 2 op-ed for Project Syndicate, Soros didn’t say whether he’s shorting China. But he did connect the dots in a way that can’t make President Xi Jinping happy. To Soros, the main risk facing the world isn’t the euro, the US Congress or a Japanese asset bubble, but a Chinese debt disaster that’s unfolding in plain sight.

“There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years,” Soros wrote.

Xi would be negligent to ignore Soros’s warnings. He’s hardly alone: Peking University professor Michael Pettis and Jim Chanos of Kynikos Associates have been beating this drum for years. Silvercrest Asset Management’s Patrick Chovanec worries about a “shadow” Chinese balance sheet that would be keeping policy makers awake around the globe, if Beijing’s obsessive opacity weren’t concealing the problem.

China would never admit to basing policy on outsiders’ warnings. Still, it’s interesting to see the flurry of official Chinese moves this week aimed at reining in the shadow banking sector. On Monday, for example, China’s Cabinet imposed new controls on the multitrillion-dollar sector, targeted off-the-books loans, and promised to beef up enforcement of current rules.

I’m thinking we need to call this industry what it really is: China’s answer to Enron. The Houston-based Enron’s real business wasn’t energy and commodities, but book-cooking. The same holds true for China’s shadow-banking entities. They are the fuel Beijing uses “to restart the furnaces,” without attracting the notice of Moody’s, Standard & Poor’s or the US Treasury Department.

China’s financial system is the ultimate black box. You don’t have to be a genius to conclude that when JPMorgan Chase estimates shadow banking to be 69 percent of China’s 2012 gross domestic product, it’s a wildly conservative guess. I wouldn’t quite add a zero, but if China fudges trade and other run-of-the-mill data, you can imagine the lengths to which it goes to hide the magnitude of its credit bubble.

 

If Soros is right and China’s economy is set to crash, then this makes the current diplomatic spat over the South China Sea and the war of words with Japan increasingly dangerous.

 Jeremy Paxman interviewed both the Japanese Ambassador and the Chinese Ambassador the other day in what would be a hilarious interview if the stakes weren’t so high.

NEWSNIGHT’S ferocious presenter Jeremy Paxman tapped previously unknown reserves of diplomacy last night by interviewing warring ambassadors from China and Japan in the same studio—but in different rooms.

The bizarre seating arrangement was a deliberate attempt to avoid a clash that could have inflamed already tense relations between the two countries, which are locked in a dispute over uninhabited islands in the East China Sea.

During an eight-minute segment on the programme last night, Mr Paxman first interviewed Japan’s ambassador to Britain, Keiichi Hayashi, for four minutes in one part of the studio before standing up and looking slightly bemused.

He then walked a few feet to another section where he greeted a smiling Liu Xiaoming, China’s representative to the UK.

That interview also lasted a carefully timed four minutes.

  • Col

    They have been doing this for years, when Southern China work folded they said about 50000 people went home, but more than that for sure.

  • GazzW

    The Japanese Ambassador lost me in his first sentence. Since when did Japan recognise sovereignty & principles? Nanjing, Pearl Harbour, Manila, Singapore & Darwin act as very good reminders of Japan’s lack of international integrity and no country has more reason to remember than China.

  • philbest

    Hugh Pavletich has been bearish on China for a while, simply because he understands the structural stuff about housing affordability and urban land Ponzi. Mainstream economists are dead from the neck upwards about it.

    China: Big Bubble Trouble

    Sunday, 5 January 2014, 12:24 pm
    Article: Hugh Pavletich

    http://www.scoop.co.nz/stories/WO1401/S00034/china-big-bubble-trouble.htm

    But I suspect Soros knows LOTS about it, hence he made a killing in 2007/2008 when all the important mainstream people up till then thought it was “a new normal”.

    There is a massive idiot from the RE sector in todays Horrid, talking about “the start of a new golden age for property values in Auckland” – i.e. now. This sort of talk is usually the sign of a long overdue crash.

  • philbest

    There is an embarasse du riches of warnings re China now. No-one can say we weren’t warned.

    As for the impact on Australia:

    http://www.forbes.com/sites/jamesgruber/2014/01/05/betting-against-china-in-2014/

    “5 Ways To Profit From A China Downturn In 2014″

    I particularly like:

    Suggestion 1: Short Australian Banks, esp CBA

    Suggestion 4: Short Fortescue Metals

    Suggestion 5: Short the Australian Dollar

    Three out of five of that Forbes columnists ideas relate to fallout in Australia…….!

    That means NZ as well, folks………

    All respect to WOBH, but you’ve been a bit cavalier about the possibilities, given our own house price bubble/household debt exposure/net external debt exposure.

    A Jon Key /Blinglish government from 2008 to 2014 is tragically absolutely no comparison to what Don Brash would have done for the NZ economy from 2005 on. The Don has been right all along, quitting a lucrative position as RBNZ Governor because he could see what needed to be done at the political level.

    Key et al have sat on their hands as the NZ house price bubble pumped up another 7% one year, 10% another year; 20% in Auckland last year. I am spewing with frustration. The answers were clear ever since the 2003 Australian PM’s Taskforce on Housing Affordability. Howard, tragically, did nothing – and look at Aussie now – and NZ also did nothing, except hold TWO Inquiries, several years apart, both of which pretty much said what the Aussie 2003 Report said.

    It’s about housing supply, DIMWITS!!!!!

    • DangerousE

      The aussie has been weak all 2013,even Soro’s himself had a go at it. Kiwi tho still holding strong. The big aus banks are pretty well cashed up cant see much damage there. Fortescue might welll be fucked, cant see NZ hurting too much from china, I see lots of opportunity if they do hit the wall however. Sorry NZ housing bubble it is not, Auckland housing bubble yes. The property market in auckland is a bit like your mayor dead set wankered

      • philbest

        The Aussie big banks are cashed up – what with?

        Mortgage backed securities?

        When house prices do what they have done in Aussie, you can be sure the whole mortgage finance sector and bank liquidity will be smoke and mirrors.

        Auckland is just the worst city in NZ, that’s all, like Dublin was the worst in Ireland. Didn’t mean they weren’t all overvalued, with plenty of scope for downside.

        Median multiples don’t lie. The next Demographia Report due in a couple of weeks should be a shocker.

        Here’s NZ’s median multiples from last year’s one:

        Auckland 6.7

        Christchurch 6.6

        Dunedin 5.1

        Hamilton-Waikato 4.7

        Napier-Hastings 4.5

        Palmerston North-Manawatu 4.4

        Taraunga-Western Bay of Plenty 5.9

        Wellington 5.4

        This year’s one will be old data anyway by the time it is released – Dorkland will be around 8 by now I reckon.

        Here’s Ireland in the 2009 Report (2008 prices, bubble peak):

        Cork 5.4

        Dublin 6.0

        Galway 5.6

        Limerick 4.3

        Waterford 4.9

        And here’s the 2010 Report (2009 prices)

        Cork 3.6

        Dublin 4.7

        Galway 3.2

        Limerick 4.2

        Waterford 3.7

        Northing to see in Godzone in 2014, move along please……..

    • Don W

      You are not wrong , and we must not forget that China is still a communist country and have only embraced a form of capitalism for the benefit of the regime rather than the benefit of the citizens as they saw how total communism destroyed the Soviet union. If China falls over , we here in NZ will feel the fall out.

  • island time

    Soros bet against the Aussie dollar at the start of 2013 and got that right as well.

  • caochladh

    Is not Soros still a fugitive from justice following a conviction for insider trading in France?

  • Mr_V4

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