Paul Singer Sees 2008 Style Crisis Brewing in China – ValueWalk Premium
Paul Singer

Paul Singer Sees 2008 Style Crisis Brewing in China

“Markets are always a puzzle,” Elliott Management founder Paul Singer mused in his June 30 letter to investors reviewed by ValueWalk. As he looks at China and non-cleared derivatives, two seemingly unrelated issues, Paul Singer's Q2 Letter  sees markets that are “sheathed in dense clouds which teasingly part for only brief glimpses of what may lie beyond.”

Paul Singer's Q2 Letter - Chinese "wealth management products" seem much like 2008-like US derivatives
Non-financial sector debt in China has grown over 400% since the 2008 financial crisis, with a debt to GDP level now rivaling Japan near 257%. Looking under the hood of Chinese debt, leverage and financial products that could be causation for the next crisis, Paul Singer's Q2 letter spots two candidates – both of which bear similarities to what was causation for the 2008 version.

Individually-held Chinese “wealth management products” appear more like a parlor game that provide a return to investors without much understanding of how they work. These investment vehicles, offered by mainstream banks, have racked up $10 trillion in assets. But Singer notes troubling similarities with the nontransparent investment products at the center of the 2008 crash.

“They are as gamey and inaccurately-disclosed as any of the contraptions of the American derivatives/structured-products/subprime/credit bubbles, and have all the complexity of cross-holdings, debt hidden under the costume of equity, and insane leverage,” he writes. “Moreover, 60% of these products have maturities of less than three months. A more powerful accelerant of a future market crisis can scarcely be imagined.”

The second issue is

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