Soros Casts Shade On China’s Economy In Most Tantalizing Way

Investors don’t tend to make a lot of money betting against China’s economy. The financial pages are littered with tales of short-sellers who bet big against Asia’s biggest economy and lost even bigger.

Yet when George Soros trains his infamous skepticism China’s way, it’s worth exploring what the billionaire investor is on about.

Granted, anytime the 91-year-old says a crisis is imminent, it’s going to make headlines. The “man who broke the Bank of England” back in 1992, and made more $1 billion doing it, tends to be the last person a government wants wagering against it.

Here in Asia, former Malaysian Prime Minister Mahathir Mohamad still can’t seem to get past Soros’s suspected role in crashing the ringgit amid the 1997-1998 Asian crisis. And now it’s China’s turn to, for better or worse, try to dismiss the Soros critique.

Chinese President Xi Jinping’s men are doing their best to roll eyes at Soros warning that a debt reckoning in slow motion, one that makes Japan’s 1990s reckoning seem tame, is closer than international markets think.

“It remains to be seen how the authorities will handle the crisis,” Soros said in a recent panel discussion. “They may have postponed dealing with it for too long, because people’s confidence has now been shaken.”

Exhibit A, Soros notes, is the default drama playing out in the all-important property sector. At the end of 2021, global markets were riveted by China Evergrande Group and other giant developers missing debt payments.

Evergrande alone faces a crushing debt of over $300 billion, including nearly $20 billion of offshore IOUs. This connects its troubles directly to global markets. It’s a reminder, Soros says, China’s boom is still undergirded by an “unsustainable” model.

The strategy now hitting a wall is one that has local governments living off the proceeds of mainlanders investing savings in homes or apartments that too often aren’t even close to completion.

This, Soros warns, could challenge social stability in the most populous nation. It also could complicate the president’s grand plan to secure an unprecedented third term later this year. Falling property values will “turn many of those who invested the bulk of their savings in real estate against Xi Jinping,” Soros says.

The situation, Soros concludes, “doesn’t look promising. Xi has many tools available to reestablish confidence—the question is whether he will use them properly.”

Yet there’s a reason why Beijing is having trouble dismantling this Soros critique. If China hadn’t spent the last nine-plus years increasing opacity—turning the economy into more of a financial black box—it could point to data suggesting Soros has lost it.

The ongoing Olympics are a microcosm of this disconnect. When Beijing hosted the games in 2008, visiting journalists had considerably more freedom to cover the nation. This time, a police-state cloud hovers over the event.

The same can be said of China Inc. As China’s economic influence grows, the level of basic transparency runs the other way. Xi’s boosters claim that Beijing is doing things its own way, and the world just has to adjust.

Global investment doesn’t work that way in the digital age. At some point, all the gross domestic product in the world ceases to matter if investment officers in New York, London or Tokyo lose all visibility of risk/reward calculations.

It’s ominous, for example, that Xi’s men continue work to export Beijing-style murkiness to Hong Kong. Who’s served by making it harder to know who owns companies or properties in the city other than party bigwigs looking to hide their financial tracks? Really, who needs cryptocurrency?

Consider, too, the spate of resignations by auditors charged with making sense of Chinese property companies. Over the last few weeks, we learned that PricewaterhouseCoopers stepped away from Hopson Development, citing insufficient access to basic information. Deloitte cut loose China Aoyuan. The mainland unit of Shimao Group is shifting to the Shanghai Certified Public Accountant auditing body.

All this deepens concerns about developers’ financial health at the same time gyrations in China’s high-yield dollar bonds flag investment algorithms everywhere. And a moment when Soros pointing out China’s recovery from the Covid-19 era looks fine on the macroeconomic level—not at the micro level. Looking under China Inc.’s hood is becoming harder and harder.

Again, the last decade is awash in 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 with Hayman Capital Management’s Kyle Bass predicting a 30% yuan devaluation in 2016. Money managers David Tepper and Bill Ackman have their own stories to tell.

And an old hedge-fund hand like Soros ringing the alarm bell doesn’t mean China’s “Minsky moment,” when a debt-fuel boom crashes, is here. Yet Soros is saying something truly tantalizing: even though Xi “has many tools” to fix China’s troubles, there’s a very open question about whether he will use them properly.

Beijing spent the last 15 months increasing control over property, tech and other sectors, not building a freer and more vibrant private sector or tolerating the media the way China had the courage to do in 2008.

We can debate what path this puts China on for the next 15 months—or the coming 15 years. But Soros can’t help but think the China bears are about to have their moment.