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.

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