Soros Says China's Debt-Fueled Growth Echoes U.S. in 2007-08

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. “It can reach a turning point later than everyone expects."

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 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.

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.

Yuan Basket

Soros was more positive about China’s efforts to link the yuan to a broad basket of currencies rather than just the dollar, saying that is a healthy development.

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 percent from 1969 to 2011.

Sustainability Question

China’s economy stabilized last quarter and gathered pace in March as the surge in new credit helped the property sector rebound, while raising fresh questions over the sustainability of the debt-fueled expansion. Gross domestic product increased 6.7 percent in the three months through March, in line with the government growth target of 6.5 percent to 7 percent for the full year.
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.
China stepped up intervention in its financial markets after turmoil in its stock market roiled global markets at the start of the year and extended last year’s $5 trillion selloff, while the yuan fell to a five-year low.