Is China Setting Up for a Financial Crisis Similar to 2008/2009 in the US?

Last night, billionaire investor George Soros issued a warning that he thinks the debt-fueled Chinese economy is beginning to look eerily similar to the US economy prior to the 2008/2009 economic collapse. (Here is the Bloomberg article on Soros' comments.) The growth in credit in China is taking place at an alarming rate and many of the loans are going to keep bad debts and loss-making enterprises alive, Soros said.

This warning is also similar to the warning Kyle Bass made in his last letter (http://www.valuewalk.com/2016/02/kyle-bass-china/).

Do these incredibly successful investors know something we don't? Yes they probably do, because their networks of contacts all over the world are expansive and the level of skill they have working for them is absolutely top notch.

But there is always someone out there shouting gloom and doom, so how do we discern when to take their warnings to heart and position our portfolio accordingly, and when not to? It is very tricky. Even George Soros, with a net worth over $20B generated through macro bets, has been wrong many times on his calls.

What I've always enjoyed about George Soros though compared to many public investors, commentators and writers is that he is not wedded to one very specific negative or positive view of the world. There are people we see on TV and read all the time that are the "perma-bears" or "perma-bulls". For instance, no matter what is happening in the world, the market trends, or the economy the perma-bear is wedded to an ideology that we are all screwed, the markets are going to collapse, you must own gold and guns because the great unwinding of capitalism is imminent.

But Soros isn't overly committed to one specific ideology. Stanley Druckenmiller, who worked for Soros for many years has even said that Soros was the absolute best at admitting when he was wrong and changing his position as the facts change. Just because something is a bubble doesn't mean he won't buy it either. In fact he has said, "When I see a bubble forming, I rush in to buy, adding fuel to the fire." 

So while Soros is supposedly betting on the collapse of the yuan and China, I seriously doubt that he has pressed this bet to an extremely large position yet. He does significant amounts of macro fundamental research but then lets price action and pscyhology guide his timing. His commentary seems to say there are risks but it is not time to bet aggressively yet. He noted that this Chinese bubble could "feed itself for some time" similar to 2005/2006 in the US. "It can reach a turning point later than everyone expects. Most of the damage occurred in the later years. It's a parabolic cycle."

Timing macro events is not our cup of tea, which is why we focus on evaluating individual businesses. But it's always good to be aware of macro-economic risks as they can affect everything down to an individual company level. China is definitely a risk we are watching. But the collapse is not here yet. Confidence in their government and policies has not yet reached a breaking point. Therefore, we need to stay aware and stay nimble.