China ‘subprime’ crisis next — Soros
BILLIONAIRE US investor George Soros says China has a “couple of years” to tame risks from nontraditional financing, whose growth had parallels with the cause of the global financial crisis.
“The rapid growth of shadow banking has some disturbing similari- ties with the subprime-mortgage market in the US that caused the financial crisis of 2007-08,” Mr Soros told the Boao Forum for Asia in China yesterday. About 97% of China’s 42million small businesses cannot get bank loans.
BILLIONAIRE investor George Soros said yesterday China had a “couple of years” to control risks from nontraditional financing whose expansion had parallels with the cause of the global financial crisis.
“The rapid growth of shadow banking has some disturbing similarities with the subprime mortgage market in the US that caused the financial crisis of 2007-08,” Mr Soros said in a speech at the Boao Forum for Asia in China. “I’m sure the authorities are aware of the dangers. They have both the skills and the resources to deflate an incipient bubble gradually.”
The comments add to concerns that the increase in credit risks triggering turmoil that would cause an economic downturn. Aggregate financing, an indicator started by the central bank in 2011 to provide a broader gauge of funding, more than doubled to a record in January from a year earlier.
“If the American experience is any guide, the authorities have a couple of years to bring shadow banking under control,” said Mr Soros. “It’s of utmost importance that the authorities should succeed. Not only for China, but also for the world.”
China can keep its economic growth model “for another year or two, but not for another decade”, as household savings are no longer sufficient to subsidise most of the economy, Mr Soros said.
The transition would not be easy, because less investment may result in slower growth and increase the chances of a so-called “hard landing”, he said.
China’s new leaders, including President Xi Jinping, have pledged to rely more on domestic demand for growth after investment and exports fuelled expansion. At the same time, Premier Li Keqiang said last month that the nation needs to maintain 7.5% annual growth to meet 2020 goals.
Last year saw the “beginnings of a hard landing” as some borrowers, especially in housing, paid higher interest rates, Mr Soros said. That increased the risk of loan defaults.
“China has been successful in changing its growth model several times in its recent history,” Mr Soros said. “So there is every reason to believe they will be able to do it again. Except for one factor: vested interests are much stronger today than they were in previous occa- sions. The rapid expansion of shadow banking indicates that the vested interests were able to exert considerable influence over stateowned banks.”
Shadow lending flourishes in China because an estimated 97% of the nation’s 42-million small businesses cannot get bank loans, and savers are seeking higher returns than lenders pay for deposits.
UBS estimates the size of the industry, including private lending, banks’ off-balance-sheet vehicles and trusts, at $3.35-trillion, or 45% of gross domestic product.
Mr Soros also said yesterday that next year will be a turbulent one with the euro at the centre of the storm, and the decline in the yen and pound will probably aggravate the recession in Europe.
At the same forum multinational companies yesterday appealed to Mr Xi to reduce barriers to doing business in China’s command economy.
In a rare audience with the head of the Communist Party, executives from PepsiCo, Samsung, Volvo and more than a dozen other companies — from agri-businesses to finance — traded handshakes with Mr Xi yesterday at the Boao Forum for Asia, while carefully broaching the problems of doing business in the world’s second-largest economy.
They complained about red tape and restrictions on investment that favour Chinese state firms and outright discrimination because of political problems.
PepsiCo president Zein Abdalla called for fairer treatment and decried limits on investing in agriculture, which PepsiCo wants for its Lays potato chips and Quaker Oats products. Bloomberg, Sapa-AP