Billionaire investor George Soros said China has a “couple of years” to control risks from nontraditional financing whose expansion has 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 U.S. that caused the financial crisis of 2007-2008,” Soros said today 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 Soros, 82. “It’s of utmost importance that the authorities should succeed. Not only for China, but also, for the world.”
China can keep its current economic growth model “for another year or two, but not for another decade,” as household savings are no longer sufficient to subsidize the majority of the economy, Soros said. The transition won’t be easy, because less investment may result in slower growth and increase the chances of a so-called “hard landing,” he said.
Domestic Demand
The nation’s new leaders including President Xi Jinping have pledged to rely more on domestic demand for growth after investment and exports fueled expansion. At the same time, Premier Li Keqiang said last month that the nation needs to maintain 7.5 percent 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, Soros said. That increased the risk of loan defaults, he said.
“China has been successful in changing its growth model several times in its recent history,” 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 occasions. The rapid expansion of shadow banking indicates that the vested interests were able to exert considerable influence over state-owned banks.”
Higher Returns
Shadow lending flourishes in China because an estimated 97 percent of the nation’s 42 million small businesses can’t get bank loans, and savers are seeking higher returns than lenders pay for deposits. UBS AG estimates the size of the industry, including private lending, banks’ off-balance-sheet vehicles and trusts, at $3.35 trillion, or 45 percent of gross domestic product.
Soros also said that next year will be a turbulent one with the euro at the center of the storm, and the decline in the yen and pound will probably aggravate the recession in Europe.
In 1992, Soros and his then-chief strategist Stan Druckenmiller made a $10 billion wager the Bank of England would be forced to devalue the pound, a trade that netted $1 billion. (Bloomberg)
