George Soros: 'Eerie Resemblance' Between China Now and Pre-Financial Crisis U.S.
George Soros lays out the warning signs of a financial crisis that he notices in China today. (4 min., 26 sec.)
Billionaire investor and philanthropist George Soros warns that conditions in China today bear an "eerie resemblance" to those in the United States in 2007 to 2008, a period that preceded the global financial crisis.
Soros, who was in conversation with Financial Times China correspondents during a ChinaFile event at Asia Society in New York on Wednesday, said one key resemblance is the unsustainable extension of credit. "It has a lot to do with real estate," he said. "But of course, since it feeds on itself, it can reach the turning point later than anybody expects."
Soros noted that it now takes about seven units of capital investment to produce one unit of economic growth in China, double what it took a decade ago — hence the expansion of credit to keep growth high, a trend the financier compared to the U.S. of a decade ago. "Around 2005 to 2006, a lot of people saw it coming, but it went on to 2007-2008, and most of the damage actually occurred in the last years because it's kind of a parabolic circle where more and more credit is needed to sustain growth."
Financial Times Asia Editor Jamil Anderlini predicted that by the end of the year, in spite of recent upticks in some top tier cities, real estate investment in China is likely to contract, leading to a much bigger slowdown in the country's economy. This is especially worrisome, he said, given that China's debt has gone from around 130 percent of GDP to over 260 percent in just six or seven years. "The absolute debt level is not a huge issue, although it is approaching Japan levels — the highest level in the world," Anderlini said. "The key problem is the speed at which you've gone from 130 percent of GDP to 260 percent. No economy in history, as far as we've been able to find, has ever seen that quick of a ramp up in debt without a financial crisis."
Soros added that, reacting to fear of unemployment and social instability, the Chinese government has artificially "re-lit the furnace" and induced a construction and real estate boom. "It is a bubble, but it can grow and feed on itself," he said, noting that while the boom has temporarily reassured the market, it has only served to further inflate the bubble. "When I saw in March that credit grew by an enormous amount, that was taken as a sign that recovery is underway," he said. "To me, it's a warning sign, because it shows how much more credit is needed to stop a decline."
Lucy Hornby, a Financial Times correspondent based in Beijing, said that this doesn't necessarily mean "a super hard landing." She said that if one envisions a standard growth trajectory that China should have experienced, given its size and population, it fell dramatically below that trajectory after 1949. Then there was a "boomerang effect" after economic reforms that made growth shoot up "like an elastic band," before moderating and falling back closer to the expected mean. But "as Mr. Soros said, they juiced it," Hornby noted. "It's coming back to the mean again, so they've juiced it again. Sooner or later I think it'll always come back to the mean. The mean is still going to be growing though.[...] The question is just whether in juicing it, they're willing to accept a time where it could go below that mean before it reverts to a more organic or natural stage, and I think they are very afraid of that."
See George Soros discuss the warning signs of a financial crisis in China in the above video clip. Watch the complete program in the video below.
Watch the complete program:
Orville Schell leads a discussion with George Soros and Financial Times China correspondents Jamil Anderlini , Lucy Hornby, and Richard McGregor on whether China is reaching the end of its "economic miracle." (1 hr., 9 min.)