To Soros, the main risk facing the world is not the euro, the US Congress or a Japanese asset bubble but a Chinese debt disaster that is unfolding in plain sight. "There is an unresolved self-contradiction in China's current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years,'' he wrote.
Xi would be negligent to ignore Soros' warnings because he is hardly alone: Peking University professor Michael Pettis and Jim Chanos of Kynikos Associates have been beating this drum for years.
China would never admit to basing policy on outsiders' warnings. Still, it is interesting to see the flurry of official Chinese moves this week aimed at reining in the shadow banking sector. On Monday, for example, China's cabinet imposed new controls on the multitrillion-dollar sector, targeted off-the-books loans, and promised to tighten rule enforcement.
We need to call this industry what it really is: China's answer to Enron. Enron's real business was not energy and commodities but book-cooking. The same holds true for China's shadow-banking entities. They are the fuel Beijing uses ''to restart the furnaces'', without attracting the notice of Moody's, Standard & Poor's or the US Treasury Department.
''There are some eerie resemblances with the financial conditions that prevailed in the US in the years preceding the crash of 2008, but there is a significant difference,'' Soros wrote. ''In the US, financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises.
''How and when this contradiction will be resolved will have profound consequences for China and the world.''