We have to admit to being pretty confounded by China. By all accounts it has grown too fast with too much waste created by the inefficiencies of central planning. And yet it continues to seemingly power ahead, (well if you believe the number are even close to correct that is). Nonetheless this piece looks at why George Soros reckons China is head for a major financial crisis, but how somewhat counterintuitively this might be a good time to buy Chinese shares…
By Justin Spittler
According to George Soros, China’s debt collapse has begun…
You may know Soros as the legendary investor who “broke the Bank of England” in 1992. He’s one of the richest people on the planet, and probably the second most famous investor in the world after Warren Buffett.
Soros’s incredible track record has made him a household name. From 1969 to 2011, his hedge funds averaged annual returns of 20%. He beat the S&P 500 nearly 2-to-1 during that span.
• On Wednesday, Soros said China is headed for a major financial crisis…
Bloomberg Business reported:
What’s happening in China “eerily resembles what happened during the financial crisis in the U.S. in 2007-08, which was similarly fueled by credit growth,” Soros said. “Most of the money that banks are supplying is needed to keep bad debts and loss-making enterprises alive.”
According to Soros, a major crisis in China is “practically unavoidable.”
• China is the world’s second-largest economy…
And it’s the world’s largest commodity consumer and exporter.
China has grown rapidly over the past two decades. It has fueled that growth with obscene amounts of borrowing. Its debt-to-GDP ratio stands at 250%. In other words, China owes 2.5x more than it produces in a year.
Today, the Chinese are borrowing more than ever. Bloomberg Business reports:
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.
• Cracks are appearing in China’s banking system…
Chinese banks were the “enablers” of China’s debt crisis. They loaned money to Chinese businesses, allowing them to rack up huge amounts of debt. Now banks’ loans are starting to go bad, according to Investor’s Business Daily.
[N]onperforming loans (NPLs) at China’s 18 major listed banks rose by more than 48 percent, or some $146 billion, in 2015, PwC said, leading to a 1.65 percent increase in the average bad loan ratio, up 0.43 percentage points from a year earlier…
“[P]ast-due loans” — those overdue but not yet officially classified as nonperforming — at the 18 banks soared by more than 45 percent to 1.51 trillion yuan ($233 billion) at the end of last year, “pushing the past-due loan ratio to 2.7 percent,” an increase of 0.76 percentage points on 2014’s figure.
• China’s largest companies are missing loan payments…
As you likely know, China is a communist country. Its government controls many key industries like oil, banking, and construction through state-owned enterprises (SOEs).
An SOE is a company owned by the government. Many SOEs enjoy monopolies. They don’t have to compete or innovate like private companies.
• In February, Baoding Tianwei became the first Chinese SOE to default on its debt…
The power equipment manufacturer missed a $153 million bond payment. Two more SOEs have missed bond payments this month. Another has warned it could miss a payment due next month.
Defaults by SOEs are extremely rare. After all, SOEs are backed by the government. The Chinese government typically bails out SOEs when they get into trouble.
• Standard & Poor’s says debt held by China’s largest SOEs has reached “critical” levels…
Last month, the credit agency warned it would cut China’s credit rating. Moody’s, another credit agency, also warned that it will downgrade China.
Problems in China’s industrial sector could erupt into a full-blown banking crisis. Profits from China’s biggest banks are already declining. Investor’s Business Daily reports:
[N]et profit growth at the country’s five main commercial banks fell to 0.69 percent last year, compared to growth of more than 6.5 percent in 2014.
China’s economy is growing at its slowest pace since 1990.
• The Chinese government is desperate to prevent a “crash landing”…
It’s cut interest rates six times since November 2014…relaxed lending standards…and lowered the minimum down payment requirement for new homes.
These “stimulus” measures have only encouraged more reckless borrowing. Total property loans in China jumped 22% last month. Home loans surged 26%.
The more debt China accumulates, the bigger its inevitable crisis will be.
• The U.S. is even more indebted than China…
The U.S. federal government owes a record $19 trillion. Its debt has more than doubled since 2007.
Dispatch readers know the U.S. government launched all sorts of extreme measures after the 2007–2009 financial crisis. It borrowed trillions of dollars…created trillions more out of thin air…and cut rates to effectively zero.
These policies were supposed to stimulate the economy…but the U.S. economy is growing at the slowest pace in decades.
Casey Research founder Doug Casey says the government’s reckless policies have set us up for a financial catastrophe.
These reckless policies have produced not just billions, but trillions in malinvestment that will inevitably be liquidated. This will lead us to an economic disaster that will in many ways dwarf the Great Depression of 1929–1946. Paper currencies will fall apart, as they have many times throughout history.
• To protect yourself, we recommend owning physical gold…
Gold has held its value for thousands of years. It has all the characteristics of good money. It’s durable, transportable, easily divisible, has intrinsic value, and is consistent around the world. And unlike dollars, the government can’t create more gold with a push of a button.
Gold is your best defense against a financial crisis. If you only do one thing to “crisis-proof” your wealth, own gold.
For other proven ways to safeguard your wealth, we encourage you to get the book we recently put together. It’s a must-read for anyone worried about the stock market, the slowing global economy, or a fragile global banking system.
Chart of the Day
Chinese stocks might be worth a look…
As you may recall, Chinese stocks crashed last summer. The SSE Composite Index, China’s version of the S&P 500, plunged 43% in six weeks. It never recovered. You can see in today’s chart it’s down 57% since June.
Chinese stocks are much cheaper than U.S. stocks. The price-to-earnings (PE) ratio, a popular valuation metric, for Chinese stocks in the SSE is 6. The PE ratio for the S&P 500 is 24. In other words, Chinese stocks are 75% cheaper than U.S. stocks.
Of course, the government controls most of China’s economy. So we’re skeptical about this data. Still, we’re attracted to anything that’s down 57% in less than a year.
Although Chinese stocks have a lot of upside, keep in mind they’re extremely volatile. If you catch a bull market, you can make a lot of money quickly. But you can also lose 20% in a couple of days if the Chinese market goes against you.
If you want to speculate in Chinese stocks, we recommend using trailing stop losses. A stop loss will automatically sell a stock when it hits a certain price. Trailing stop losses “move up” as the stock price moves up. They prevent runaway losses when investing in volatile assets like Chinese stocks. We use a program called TradeStops to monitor our stop losses. You can try out the same system we use by clicking here.