Soros says China's debt-fueled growth echoes US in 2007-08

NEW YORK (BLOOMBERG) - Billionaire investor George Soros said China's debt-fueled economy resembles the US 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, Mr Soros said at an Asia Society event in New York on Wednesday (April 20). The broadest measure of new credit in the world's second-biggest economy was 2.34 trillion yuan (S$485.53 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 US in 2007-08, which was similarly fueled by credit growth," Mr Soros said. "Most of money that banks are supplying is needed to keep bad debts and loss-making enterprises alive."

Mr 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 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.

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 US in 2005 and 2006, Mr Soros said.

"Most of the damage occurred in later years," Mr Soros said. "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.

Disagreeing, HSBC econmists led by Qu Hongbin said in a note on Thursday (April 21): "Concern about China's debt levels posing a systemic risk is overblown, and policy easing so far has not exacerbated overcapacity."

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 US$1 billion with a bet that the UK 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. Mr Soros, who began his career in New York in the 1950s, saw his hedge fund post 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, which makes people nervous and spurs them to pull money out, Mr 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.

"There is a definite urge for people to diversify, to get your wealth out," said Mr Soros.

Mr Soros was more positive about China's foreign-exchange policy, saying efforts to link the yuan to a broad basket of currencies rather than just the dollar are a healthy development, and that the threat of competitive devaluation is greatly diminished.