Salient to Investors:

William Pesek writes:

George Soros believes the main risk facing the world is a Chinese debt disaster that is unfolding in plain sight. Soros said China’s restarting of the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years. Soros sees eerie resemblances with the US in the years preceding the crash of 2008, but with a significant difference. In the US, financial markets tend to dominate politics, but in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises, so how and when this contradiction will be resolved will have profound consequences for China and the world.

Michael Pettis at Peking University and Jim Chanos at Kynikos Associates have been warning of this for years. Patrick Chovanec at Silvercrest Asset Mgmt said the “shadow” Chinese balance sheet would worry policy makers around the globe but for China’s obsessive opacity concealing the problem. China’s shadow-banking entities is its answer to Enron.

JPMorgan Chase estimates shadow banking is 69 percent of China’s 2012 GDP and is a wildly conservative guess. China fudges trade and other run-of-the-mill data, so you can imagine the lengths it goes to hide the magnitude of its credit bubble.

Stephen Roach warns of China’s propensity for thinking that slogans are sufficient. China can either restructure its economy or grow rapidly, but not both. The higher China’s growth rate, the less retooling that is going on and the more debt the nation is amassing behind the scenes.

The way such regional leaders win Beijing’s attention is rapid growth, causing dozens of nascent super cities all borrowing like mad to deliver big GDP numbers.

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