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George Soros: “There’s A Crash Coming”

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George Soros There's A Crash Coming

Even though China has shown impressive economic development growth figures over the first quarter, George Soros, an American business magnate, investor and philanthropist found a reason for the world’s largest population nation to worry. In addition to his previous comments, he fully believes that China is facing a severe financial catastrophe.

 

Soros’s Opinion Has Weight, But Does It Have Merit?

George Soros is the owner of a hedge-fund which managed to gain a substantial growth of nearly 20 percent yearly for the last 30 years. He is now worth about $27.3 billion.

However, does this mean his opinion regarding the Chinese economic state has grounds? Well, the truth is there are solid arguments supporting both options. 

Arguably, there is some similarity between the Chinese current economic condition and the one in the US back in 2008.

Nevertheless, there is a wide range of factors that should be thoroughly considered, prior to jumping to any conclusions.

The major counter argument is that China has a one-party government system which exercises unprecedented control over the entire economy.

Bearing this in mind, the conventional analytic tools must be jettisoned. At this point, a comparison between both situations seems rather far-fetched.

 

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Financial Stress Seems To Be Piling On

Regardless of the strong first quarter, financial stress thus seems evident. The most reliable indicator is China’s hiding in bond markets.

Analysts began to look at China as the new weak link as liquidity seems to be drying up.

Over 40 companies reportedly canceled their scheduled issuance since March. This came as a surprise to many, provided that the year managed to begin with record-breaking domestic issuance.

In any case, the most apparent sign of financial stress could be observed in the currency market of China.

The most recent financial decisions triggered substantial outflows of capital. This is because of the decision to go for an exchange rate driven by the market.

At the same time, the People’s Bank of China has reportedly cut the interest to the lowest rates in its business history.

Authorities had to direct billions of dollars towards the economy. On top of that, the current information reveals that the manufacturing sector is, in fact, sluggish.

 

Supporters of Soros’s Predictions

The investment house CLSA issued a financial report, attributing to Soros’s opinion. They argued that by 2017 China will have absolutely no choice but to allow their currency to float freely.

This embrace of the market will definitely lead to a hard landing with the yuan falling with more than 25%.

Even though China reports a record trade surplus of $365 billion over the last year, the financial account might be the main point of pain.

CLSA reports that the current policy of a steady depreciation as well as a struggling peg won’t be able to fix the problems with the financial account.

In conclusion, the investment house predicts that the current financial policy of the country will only make matters worse.

 

Beijing Backed Into A Corner

Facing an actual depletion in outside exchange rates, the only solution for Beijing seems to be the exchange rate driven by the market. If history is any indicator, however, this could go terribly wrong.

The main reason for past capital outflow is because the currency’s value is open to the actual market.

Potentially, the market-driven exchange rates could lead to a price discovery. In any case, the approach poses some serious risks.

As always, the warnings of Soros must be taken into serious consideration. While China shows significant growth over the first quarter, its size could appear to be the main issue. It could mean that the country is facing a grave credit unraveling.

Furthermore, Moody’s and S&P also cut the credit outlook and it was negative in March.

This seems to be giving more grounds to the warnings of George Soros. However, it’s hard to compare the current financial situation of China with the one the US was facing back in 2008. 

 

An Impact On The Rest Of The World

China has reportedly become the biggest economy in the world.

This is measured by the sheer quantity of services and goods which are produced. Logically, a shakedown in its economy would have a huge impact on the entire world. Some of them are:

  • Cutting export growth of the countries which rely on Chinese’s demands. A lot of countries’ economies rely on their export connections with China. Considering the gravity of its manufacturing segment, this is only logical.
  • The prices of oil could potentially skyrocket. The economic strength of China is one of the main reasons for which the prices for a barrel dropped significantly. A financial shakedown is going to cause the prices to increase once again, impacting numerous countries.
  • Gravely impacting inflation and monetary policy. While fears of a negative spiral could be quite exaggerated, the risk of a deflation is rather real. The low prices of Chinese goods genuinely lower the commodity prices. This means that a slowdown in China could cause global deflation.

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