George Soros Warns "China Resembles US In 2008", Hard Landing "Practically Unavoidable"

Tyler Durden's picture

China's credit growth in March (and $1 trillion surge in total social financing in Q1) is a "warning sign" according to billionaire George Soros, "because it shows how much work is needed to stop the slowdown." Speaking at an event in new York this evening, Soros commented on "troubling developments" in China, the anti-corruption drive's impact on capital outflows and the real-estate bubble "feeding on itself." His conclusion, rather ominously, was that despite all the naysayers and fiction-peddlers, China "resembles US in 2007-8," before credit markets seized up and spurred a global recession.

As Bloomberg reports, Billionaire investor George Soros said China’s debt-fueled economy resembles the U.S. in 2007-08, before credit markets seized up and spurred a global recession.

China’s March credit growth figures should be viewed as a warning sign, Soros said at an Asia Society event in New York on Wednesday. The broadest measure of new credit in the world’s second-biggest economy was 2.34 trillion yuan ($362 billion) last month, far exceeding the median forecast of 1.4 trillion yuan in a Bloomberg survey and signaling the government is prioritizing growth over reining in debt.

 

[ZH - f one adds up the Total Social Financing injected in the first quarter, one gets a stunning $1 trillion dollars in new credit, or $1,001,000,000,000 to be precise, shoved down China's economic throat. As shown on the chart below, this was an all time high in dollar terms, and puts to rest any naive suggestion that China may be pursuing "debt reform." Quite the contrary, China has once again resorted to the old "growth" model where GDP is to be saved at any cost, even if it means flooding the economy with record amount of debt.

 

With China's debt/GDP already estimate at 350%, how much longer can China sustain this stunning debt (and by definition, deposit) growth continue?]

 

Soros, who built a $24 billion fortune through savvy wagers on markets, has recently been involved in a war of words with the Chinese government. He said at the World Economic Forum in Davos that he’s been betting against Asian currencies because a hard landing in China is “practically unavoidable.” China’s state-run Xinhua news agency rebutted his assertion in an editorial, saying that he has made the same prediction several times in the past.

Soros then went on to note that China’s capital outflow is a growing phenomenon driven by the nation’s anti-corruption campaign, which makes people nervous and spurs them to pull money out, and added that...

China’s decoupling of the yuan from the U.S. dollar can help rebalance the currency.

 

The linking to a basket of currencies is a “very positive, healthy” development for world.

Finally in an ironic twist for a man who has all too often used the press for his own ends...

China’s lack of a free press is “troubling development".

Of course one should bear in mind that Soros is among those who are betting heavily on the eventual devaluation of The Yuan against the USD, and as we noted previously, the cracks are starting to show... As the Chinese corporate bond market begins to break...

 

At least 64 Chinese firms have postponed or scrapped planned note sales this month, six times more than the same period a year earlier.

And as BofA's David Cui explains, if poorly handled, they may cause significant financial instability...

Since 2015, eight SOE bond issuers have run into repayment problems; four since February. We believe that the sharply accelerating pace and the growing chance of genuine defaults are largely behind the recent widening of credit spreads (Bond yield rising, credit spread widening & impact on stocks, Apr 15). In our view, any major SOE bond default would be difficult for the financial system to handle – as it is unexpected, it could lead to panic selling/a credit crunch (2016 Year-Ahead: what may trigger financial instability, Jan 3). At this stage, we expect that most problematic SOE bonds, if not all, will get largely bailed out. But this is a key risk that we need to monitor for the equity market outlook.

Chart 1 shows the dates when the potential defaults were first reported vs. the credit spread of 5Y AA-rated enterprise bonds (more details on the bonds, Table 1). Among the eight, Tianwei, Erzhong, Sinosteel, China Coal Huayun and China Railway Materials are central SOEs; Guangxi Nonferrous, Yun Feng and Dongbei Special Steel are local ones. The media reported that some of these SOEs actively sought defaults in order to lessen their debt burdens – a few even reshuffled their assets in preparation (Caixin, Apr 18). This clearly raises the chance of genuine defaults in the bond market’s mind, in our view.

 

Based on our assessment, the dynamics among the key stakeholders are as follows: some SOEs want to default; many local governments may lack the financial resources to save their SOEs from defaulting; the central government has the resources (after all, it can print), but needs to balance short-term financial stability with moral hazard concerns; the bond underwriters, many of them banks that lend to the same SOEs, need to balance financial interests against the risk of reputation damage and potential lawsuits; bond holders may go on a buying strike to force bail-outs.

At this stage, we expect the central government and the bond underwriters to largely come up with the money to prevent any significant default of SOE bonds. It appears to us that, leading up to the 19th Party’s Congress in late 2017 (when a new group of leaders will be officially announced), a top priority of the central government is to prevent a financial crisis. For banks, the cost of bail-outs could be hidden for quite some time, so the incentive for them to suppress defaults is strong, in our view. Actually, there was at least one case in which a listed bank used its WMP under management to cover a defaulting bond ((Shadow banking default, pace accelerated sharply since mid-2015, Apr 7).

If our expectation is right, the bond market could calm down as soon as it sees signs that bail-outs are the likely scenario. This would kick the can down the road, using liquidity to paper over a solvency issue.

If, against our current expectation, the government/underwriters keep in mind:

Implicit guarantee & contagion risk: SOEs default on loans all the time, but banks don’t “panic” unless there is a deposit run. However, the same stability cannot be maintained as easily in the shadow-banking sector. The shadow-banking sector is largely a market where greed, fear and herd mentality reign supreme. For years, bond buyers believed that bonds issued by any government-related entity, including SOEs and LGFVs, were bullet-proof. If this perceived “implicit” guarantee is broken, at a minimum, credit spreads would widen sharply and, at the worst, panic selling could develop, generating a negative spiral. Moreover, contagion risk could be high: if this “promise” is broken, will the market still believe in perceived government guarantees elsewhere, including those on RMB, the A-share market or housing prices?

 

Expensive valuation: before the latest widening, credit spreads for AAA and AA+ rated LGFV bonds and enterprise bonds (largely SOEs’) were very narrow, at between 50-100pbs. As a result, the risk of holding on to these bonds is asymmetrical, unless one believes that the government will lower the risk-free rate significantly going forward (Bond yield rising, credit spread widening & impact on stocks, April 18). As a result, the market is biased toward selling at the moment, by our assessment.

 

Leverage: the more transparent part of bond leverage is via repos and structured funds, which appear manageable at this stage (Bond market: leverage & potential defaults, 23 Oct 2015). However, a risk is that there could be significant amount of hidden leverage. Anecdotally, some banks provide loans to WMPs under their management to buy bonds, so the WMPs can achieve the “promised” returns to WMP buyers (currently, around 4% p.a.)

 

A lack of transparency: the most important buyers of bonds in China include WMPs managed by banks, brokers and fund subsidiaries, banks themselves, money market funds and bond mutual funds, and insurers. While risk responsibility is clear-cut for most bond buyers, it is not so for the WMPs. Legally speaking, WMP buyers own the downside risk. However, the way that WMPs are sold in China has led many buyers to believe that these products are essentially term deposits. As a result, if financial institutions decide to pass on some of the default losses to these buyers, they may stop buying en masse, essentially generating a “bank” run in the shadow-banking sector (Risk of bank-run WMPs is rising, Feb 28). By the way, if the financial institutions, including banks, allow some SOE bonds to default, they will most likely pass on at least some of the losses. If they have to bear the losses themselves, they’d be much better off bailing out the bonds in stealth before the defaults, both financially and politically.

Even without a panic, if the bond market becomes more cautious as a result of SOE bond defaults, there could be negative implications on credit flow, credit cost, economic growth, commodity demand, the RMB and the stock market.

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junction's picture

Why do we have to listen to this tax-dodging Jewish Nazi?  Can't Soros just die a miserable death?  Right now.

booboo's picture

Why was he not arrested for inciting riots? at a minimum run over, shot and hung.

Buckaroo Banzai's picture

I'd like to give George a "hard landing".

TeamDepends's picture

Shorting the yuan, are ya Georgi?

Four chan's picture

they will just print, no harm in that...right?

edotabin's picture

Imagine what would happen if Trump actually manages to bring 1000 factories back to America.

As for Soros, he will definitely not be missed. He's like 129 years old, isn't he?

38BWD22's picture

 

 

Well, well, so the old bastard comes out against a BRIC.  I have not kept up with Soros announcements, what has he to say re the rest of the BRICs?

Contrary indicator?  

Does ol' Soros have a record of mutilating muppets like Goldman-Sachs does?

philipat's picture

How about, instead, "The US resembles The US in 2008. But much worse because the debt has doubled"...??

The Saint's picture
The Saint (not verified) philipat Apr 20, 2016 11:45 PM

It sounds like Soros wants to cover a huge short position.

old naughty's picture

Soros, soros, soros...

short, short, short...

Ha, Ha, Ha !

NoPension's picture

I like Trump, but those factories are gone. And they ain't coming back. Not in our lifetimes.
We have lost or are losing fast the talent needed to manufacture. Not on a scale or in a way that re-employs the vast number of dumbasses in this country.
The environmental crap alone is a big enough hurdle to keep it from happening.
I don't know where we are heading, but it don't look good. Not for the dumbass masses, anyhow. Oh, it's high cotton if you work for the government, ( in any capacity) or a government contractor. But the private sector sucks ass. It's got to make a profit AND pay for the .gov leeches.

Squid-puppets a-go-go's picture

all it takes for those skills and factories to return over time is a switcheroo between the RMB:US 1/x

Omega_Man's picture

tell us the maximum,,, be explicit pls

orez65's picture

The US resembles the US in 2008.

Jug Jugette's picture
Jug Jugette (not verified) booboo Apr 21, 2016 3:53 AM

No drawing and quartering?

Omega_Man's picture

Satan can't die... smarten up

Kefeer's picture

No one dies; Soros and Satan will know each other in ways that only Obama will enjoy.

38BWD22's picture

 

 

Two or three very interesting observations packed into your sentence there Kefeer.

It's interesting how when you realize that we all will have eternal life how that changes viewpoints...

Katos's picture

I read somewhere along time ago, that these skeletons with skin on them, like Soros, Rockefeller,  etc. Actually have had themselves cloned severaltimes.  They keep these clones on ice,  then when they need a kidney, a heart, a liver, bamm! Their dream is to live forever ?

Tarjan's picture

forget it. can't get the obama - soros pic pasted here.

 

Tarjan's picture

Well, there is this

~

Philo Beddoe's picture

This has to be bullish. 

Omega_Man's picture

like to see George have a hard landing on sharp metal impalers  

Yen Cross's picture

 My wish, is that George Soros lands sphincter first, from the top of a building, on a huge iron spike.

Omega_Man's picture

nice one... a tall building too I suppose?

Yen Cross's picture

   I smell desperation,

JamaicaJim's picture

So.....whaddya doin about it George you reptilian fuck?

 

My guess?

NOT HELPING!!!!

please....George....go away and die quietly...die violently....die suddenly...just...die

4shzl's picture

Just another PigMan talking his book -- get used to it.

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Apr 20, 2016 8:47 PM

When I saw "George Soros" I cried a little bit when the next word wasn't "dead" :(

coast's picture

1.  Sounds like he is talking about the u.s. and dozens of other countries.    2. Was Soros warning about u.s. in 2007?  No.  3. He is truly satanic, and takes my satanic remark as a compliment.

Crawdaddy's picture

One of the main signals that demonstrates society is one day improved, will be the reaction to the mention of the creepers like George Soros and his ilk. If we have a healthy society, the reaction will be an armed march to locate the person CLAIMING to be him and route them out.

NWO delenda este.

nmewn's picture

Fascists have always hated communists...and vice versa.

I'm for equality!!!

I hate them both ;-)

38BWD22's picture

 

 

Yes, they are so much alike yet they hate each other.  Both are enemies of our liberty.  Ah, kind of like the Far Left and Muslims here, so much hate...

Spungo's picture

I think China is far worse than 2008. That chart showing how much credit expansion they did compared to the US is astounding. They'll be lucky if they don't have riots.

83_vf_1100_c's picture

Poor Vietnam. They are going to be swamped by economic refugees. Soros will never die so long as he has a supply of children's blood to drink.

outlaw.guru's picture

Although that might be true there are two very important factors. One is the intended internationalization of renminbi that could give China quite a bit of place to ease without inflation. The other important item is that if things don't go according to plan for Chinese "free" market capitalism, they could also get back to some other form. As long as the state guarantees a wealth distribution deemed fair by the most and backed by weaponry China will overcome its problems.

Omega_Man's picture

so just now Soros sees china's real estate as a bubble..... that explains how this brainiac got so rich

Dirtnapper's picture

More likely his trying to scare off any new capital flowing into China in order for China to push them further into the red.  Enough pressure and the Chinese Communist Party will not being to stop things from going critical mass on finances and currency.

Paul John Smith's picture

And gee ...

Who would want the CCP to fail?

Yen Cross's picture

  It's not that easy.. Soros and Sam Zale jerk eachother off, every other weekend in the jacuzzi at Augusta.

Omega_Man's picture

CHIINA .. (as said by Trump) should extradite Soros to CHINNA and fed to small monkeys bit by bit after having his anus impaled with a 20 foot silver spike and left in the square for three days... 

 

warning... monkey brains not to be eaten as it may spread the evil virus 

coast's picture

Every time I see George Soros or hilery or etc,  its a reminder how I was right 15 years ago when I believed David icke while everyone else was laughing at him....friggin reptilians there is no doubt..

khnum's picture

With George its more amphibian as in poisonous toad

Peconic Bay's picture

WMP (Wealth Management Products) investors are the Chinese equivalent of Muppets.

williambanzai7's picture

Funny, I thought the US resembles the US in 2008.

mary mary's picture

:-)  Or maybe in 1775.  :-)