Billionaire investor George Soros said China’s debt-fueled economy resembles the U.S. in 2007-08, before credit markets seized up and spurred a global recession.
China’s March credit-growth figures should be viewed as a warning sign, Soros said at an Asia Society event in New York on April 21. The broadest measure of new credit in the world’s second-biggest economy was 2.34 trillion yuan (US$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.
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."
Soros, who built a $24 billion fortune through savvy wagers on markets, has recently been involved in a war of words with the Chinese government. He said at the World Economic Forum in Davos in January that he’s been betting against Asian currencies because a hard landing in China is “practically unavoidable.” China’s state-run Xinhua news agency rebutted his assertion in an editorial, saying that he has made the same prediction several times in the past.
Soros said China’s banking system has more loans than deposits and has “troubles on the assets side but also increasingly troubles on the liabilities side.”
“Other banks have to lend to each other and that’s an additional source of uncertainty and instability,” he said. “The problem has been deferred and it can be deferred for another year or two but its growing, and growing at an exponential rate.”
China’s economy gathered pace in March as the surge in new credit helped the property sector rebound. Housing values in first-tier cities have soared, with new-home prices in Shenzhen rising 62 percent in a year. While China’s real estate is in a bubble, it may be able to “feed itself for some time,” similar to the U.S. in 2005 and 2006, Soros said.
“It can reach a turning point later than everyone expects,” he said. “Most of the damage occurred in later years. It’s a parabolic cycle."
Andrew Colquhoun, the head of Asia Pacific sovereigns at Fitch Ratings, is also concerned about China’s resurgence in borrowing. Eventually, the very thing that has been driving the economic recovery could end up derailing it, because China is adding to a debt burden that’s already unsustainable, he said in an interview in New York. Fitch rates the nation’s sovereign debt at A+, the fifth-highest grade and a step lower than Standard & Poor’s and Moody’s Investors Service, which both cut their outlooks on China since March.
“Whether we call it stabilization or not, I am not sure,” Colquhoun said in an interview in New York. “From a credit perspective, we’d be more comfortable with China slowing more than it is. We are getting less confident in the government’s commitment to structural reforms.”
Not everyone agrees. Concern about China’s debt levels posing a systemic risk is overblown, and policy easing so far has not exacerbated overcapacity, HSBC Holdings Plc economists led by Qu Hongbin wrote in a note on April 21.
Soros has warned of a 2008-like catastrophe before. On a panel in Washington in September 2011, he said the Greece-born European debt crunch was “more serious than the crisis of 2008.”
The Hungarian-born investor rose to fame as the manager who broke the Bank of England in 1992, netting $1 billion with a bet that the U.K. would be forced to devalue the pound. Malaysian Prime Minister Mahathir Mohamad called him a “moron” during the 1997 Asian financial crisis, saying he was out to wreck the region’s economies. Soros, who began his career in New York in the 1950s, saw his hedge fund post average annual gains of about 20% from 1969 to 2011.
Capital outflows from China are a growing phenomenon driven by the nation’s anti-corruption campaign, which makes people nervous and spurs them to pull money out, Soros said. While China’s reserves swelled by $10.3 billion in March to $3.21 trillion, they’re down by $517 billion from a year earlier.
“There is a definite urge for people to diversify, to get your wealth out," said Soros. The withdrawal of China’s Anbang Insurance Group Co. $14 billion takeover offer for Starwood Hotels & Resorts Worldwide Inc. is an “outstanding example” of the nation’s capital controls, he said.
Soros was more positive about China’s foreign-exchange policy, saying efforts to link the yuan to a broad basket of currencies rather than just the dollar are a healthy development, and that the threat of competitive devaluation is greatly diminished.
He also cited growing cooperation between the U.S. and China as a reason for calming markets after the turmoil at the start of the year. Soros said China’s service industry is gaining momentum but that productivity increases are harder to come by than in manufacturing.
Ma Jun, the chief economist at the central bank’s research bureau, said in a speech this month that recent data points including real estate investment growth, industrial value-added growth, and producer prices indicate the economic outlook is probably better than some economists forecast.
The stabilizing trend isn’t giving investors “enough confidence,” as China seems to have relied more on government investment in state-owned enterprises to boost the economy, said Gao Xiqing, former vice chairman of the China Securities Regulatory Commission, in an interview in New York this week.