China’s debt-fuelled growth like U.S. in 2008
But investor says it’s unsustainable
Billionaire investor George Soros said China’s debt-fuelled 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 Wednesday. The broad est measure of new credit in the world’s second-biggest economy was 2.34 trillion yuan ($460 billion) last month, far exceeding the median forecast of 1.4 trillion yuan in a Bloomberg survey and signalling 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 fuelled 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 US$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 staterun 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.
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 per cent 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.
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.
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 Thursday.
The Hungarian-born investor, who began his career in New York in the 1950s, saw his hedge fund posted average annual gains of about 20 per cent from 1969 to 2011.
Capital outflows from China are a growing phenomenon driven by the nation’s anti-corruption campaign, Soros said. While China’s reserves swelled by US$10.3 billion in March to US$3.21 trillion, they’re down by US$517 billion from a year earlier.