Soros throws shade at China’s economy in the most tantalizing way
Investors don’t tend to make a lot of money betting against the Chinese economy. The financial pages are littered with stories of short sellers betting big against Asia’s biggest economy and losing even more.
Yet when George Soros trains his infamous China-style skepticism, it’s worth exploring what the billionaire investor is up to.
Surely, every time the 91-year-old says a crisis is imminent, it will make headlines. “The man who blew up the Bank of England” in 1992, and who made over a billion dollars doing it, tends to be the last person a government wants to bet against him.
Here in Asia, former Malaysian Prime Minister Mahathir Mohamad still can’t get over Soros’ alleged role in crashing the ringgit amid the 1997-98 Asian crisis. And now it’s China’s turn, for better or worse, to try to dismiss Soros’ criticism.
Chinese President Xi Jinping’s men are doing their best to roll their eyes at Soros warning that a slow debt reckoning, which is making 1990s Japan’s reckoning tame, is closer than international markets think.
“It remains to be seen how the authorities will handle the crisis,” Soros said during a recent roundtable. “They may have taken too long to deal with it because people’s confidence has now been shaken.”
Exhibit A, Soros notes, is the default drama unfolding in the all-important real estate industry. At the end of 2021, global markets were riven by the China Evergrande Group and other giant developers who failed to repay their debts.
Evergrande alone faces crippling debt of more than $300 billion, including nearly $20 billion in offshore IOUs. This connects its issues directly to global markets. It’s a reminder, says Soros, that China’s boom is still underpinned by an “unsustainable” model.
The strategy now hitting a wall is one that sees local governments living off the income of mainlanders who invest savings in houses or apartments that too often aren’t even close to being completed.
This, Soros warns, could challenge social stability in the most populous nation. It could also complicate the president’s grand plan to secure an unprecedented third term later this year. Falling property values ”will turn many of those who have invested most of their savings in real estate against Xi Jinping,” Soros said.
The situation, Soros concludes, “does not look promising. Xi has many tools to restore trust, the question is whether he will use them correctly.
Yet there is a reason Beijing is struggling to dismantle this criticism of Soros. If China hadn’t spent the past nine-plus years increasing opacity — turning the economy into a financial black box — it could point to data suggesting Soros has lost it.
The current Olympics are a microcosm of this disconnect. When Beijing hosted the Games in 2008, visiting journalists had much more freedom to cover the country. This time, a police cloud hangs over the event.
The same can be said of China Inc. As China’s economic influence increases, the basic level of transparency reverses. Xi’s supporters say Beijing is doing things its own way and the world just has to adapt.
Global investing doesn’t work that way in the digital age. At some point, all of the world’s gross domestic product ceases to matter if investment managers in New York, London or Tokyo lose visibility into risk/reward calculations.
It is worrying, for example, that Xi’s men continue to work to export Beijing-style darkness to Hong Kong. Who is served by making it harder to know who owns businesses or properties in the city other than party bigwigs looking to hide their financial tracks? Really, who needs cryptocurrency?
Consider also the wave of resignations from auditors tasked with making sense of China’s real estate companies. In recent weeks, we have learned that PricewaterhouseCoopers has withdrawn from Hopson Development, citing insufficient access to background information. Deloitte let go of China Aoyuan. Mainland Unit of Shimao Group Switches to Shanghai Certified Public Accountants Auditing Body.
All of this heightens worries about the financial health of developers, at the same time as swings in China’s high-yield dollar bonds signal investment algorithms everywhere. And a moment when Soros highlighting China’s recovery from the Covid-19 era looks good on a macro level, not a micro level. Looking under the hood of China Inc. is getting harder and harder.
Again, the past decade is awash with cautionary tales. A warning 12 years ago from hedge fund manager Jim Chanos that China is “on a treadmill to hell” doesn’t seem to have aged well. The same goes for Kyle Bass of Hayman Capital Management predicting a 30% devaluation of the yuan in 2016. Fund managers David Tepper and Bill Ackman have their own stories to tell.
And an old hedge fund hand like Soros ringing the alarm bells doesn’t mean China’s “Minsky moment” when a debt and fuel boom crashes is here. Yet Soros is saying something truly tantalizing: even though Xi “has many tools” to solve China’s problems, there is a very open question as to whether he will use them properly.
Beijing has spent the past 15 months strengthening control over property, technology and other sectors, without building a freer and more vibrant private sector or tolerating the media as China had the courage to do in 2008.
We can debate where that puts China on for the next 15 months or the next 15 years. But Soros can’t help but think the Chinese bears are about to have their moment.