China’s debt echoes US in 2007 to 2008

BILLIONAIRE investor George Soros said China’s debt-fuelled economy resembles the United States in 2007 to 2008, 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 last Wednesday. The broadest measure of new credit in the world’s second-biggest economy was 2.34 trillion yuan ( RM1.4 trillion) last month, far exceeding the median forecast of 1.4 trillion yuan in a Bloomberg survey and signalling the government is prioritising growth over reining in debt.

What’s happening in China “eerily resembles what happened during the financial crisis in the US in 2007 to 2008, 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 ( RM94 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 firsttier cities have soared, with newhome 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 United States 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 stabilisation 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. — WP-Bloomberg