Legendary investor George Soros said that China’s financial system right now
“eerily resembles what happened during the financial crisis in the US in 2007-08,” Bloomberg reported.
“Most of money that banks are supplying [in China] is needed to keep bad debts and loss-making enterprises alive,” he said at a conference at the Asia Society in New York.
It’s especially important that Soros said this right now. It seems China is trying to reflate a bubble, and Soros is warning that it will come back to haunt them down the line.
To recap, the entire world thought China was about to descend into a tailspin in early 2016. Its currency and stock market were volatile, as credit continued to build up in an increasingly unproductive corporate sector.
Then last month, the government ramped up the China machine. Credit exploded 58% higher than this time last year as banks started lending again. Property sales also shot up 60%, which means another construction boom is sure to follow.
Expect demand for construction materials to ramp up too. That’s been sending commodities prices, which hit lows last year, up across the board. Hungry China is back again.
To kill two birds with one stone, China is opening up factories that went broke, keeping its citizens in employment while keeping its economy “growing.”
Steel is a perfect example of this situation (rebar is a unit of measurement used for some commodities):
Soros thinks that China may be able to continue with this empty growth for a few years, just like the US did in 2005 and 2006, but that eventually it will come back to hurt them. Like the steel prices on the chart above, Soros said that this cycle is “parabolic.”
“Most of the damage occurred in later years,” he said according to Bloomberg, referring to the spurt in US growth before the crash.
Soros has been outspoken about China before. Earlier this year he said that the country faced a hard (but survivable) landing.
If Soros is right, then this latest credit boom is just a bump on a way to that end. The country is feeding its economy on empty calories, and eventually it will realise that it’s starving.