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 Wednesday. The broadest measure of new credit in the world’s second-biggest economy was 2.34 trillion yuan ($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.
‘Parabolic Cycle’
“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."
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