China Economy

George Soros tempers praise for Beijing with warning on risks

PUBLISHED : Sunday, 07 April, 2013, 12:00am
UPDATED : Sunday, 07 April, 2013, 9:30am

Billionaire investor George Soros, who has fallen foul of governments as far afield as Malaysia and Britain during a 60-year career, has praised China's system of financial regulation. But he warned that Beijing faces "exceptional difficulties" in its economic transition in the near term.

Speaking in an interview, the Hungarian-American financier, 83, also cautions against "overconfidence" among Chinese officials, and advises against investors entering some of China's hottest asset markets in the short term.

"I hold China's financial regulatory system in very high regard," he said in Hong Kong.

Soros is perhaps best known as "the man who broke the Bank of England" when he shorted the pound in the British currency crisis of 1992, effectively forcing Britain out of the European exchange-rate mechanism, a precursor to the euro.

He also drew the ire of former Malaysian prime minister Dr Mahathir Mohamad, who suggested in 1997 that Soros was part of a wider Jewish conspiracy and responsible for the Asian crisis.

He is now retired, he says, and is not directly involved in the daily operations of the hedge fund firm he founded, Soros Fund Management.

In the wide-ranging interview, Soros praised the know-how and experience of Chinese officials.

"The Chinese regulators have a much closer and more intimate knowledge of what goes on inside the banks," he said. "The lack of detailed knowledge in the West is quite amazing. And that was the reason why things went so wrong. "

Soros predicted the latest global financial crisis in his 2008 book, The New Paradigm for Financial Markets, which foresaw the collapse of a "super bubble" that had built up in the global financial system.

However, he seems much less concerned about China, including its vast shadow-banking system and huge local government debts.

Its stock markets have taken a hit since late last month when banking regulators announced new rules tightening control over banks' wealth management products, including funds and bonds that offered higher yields than bank deposits.

Such products, which banks have used to lend to capital-hungry industries off their balance sheet, carry the potential danger of large-scale defaults.

"The authorities are aware of the problem, and they also have very substantial resources available to deal with the problem," Soros said. "They will be able to deflate the incipient bubble without [triggering] a serious financial crisis."

The risk of local governments defaulting on their mounting debts, which the National Audit Office estimates at 11 trillion yuan (HK$13.6 trillion), is also unlikely, according to Soros.

"I can't imagine the central government allowing local governments to default, just as it is most unlikely that the state-owned banks would allow one of their wealth management companies to default. The consequences would be too severe."

If local authorities found themselves unable to pay interest on their debts, Beijing might simply step in and shift the liabilities to its own books, at the same time seizing more control over local governments' finances, he said.

But Soros cautioned investors to stay away from Chinese real estate in the short term.

That sector was vulnerable because many residents had been treating property as a kind of savings, with many families accumulating more than one flat when mortgage loans were easily available, he said.

"It's part of the transformation that at least the empty apartments will have to be sold, or maybe taxed," he said. "I think they are now a risky investment."

He welcomed pilot programmes in some major Chinese cities to introduce property taxes on empty flats, but advised doing it "gradually and gently", to avoid triggering panic selling and a crash.

He sounded equally bearish on the stock market, saying he was not surprised that the Chinese market performance had lagged the broader economy, citing a lack of profits.

Only if the new Beijing leadership succeeded in changing the economy from an export- and investment-driven model to one powered by robust domestic consumption, would he see good value in the leading consumer goods companies, he said.

While he expressed general confidence in Chinese officials' ability to chart an economic course to avoid major shocks, Soros said he was worried they might become overconfident.

In particular, the new leadership's plans to aggressively accelerate urbanisation, which it sees as a key engine of continued economic growth in the years to come, might be "too rigid", he said.

"China has been at the forefront of economic planning, and very successful at it. But maybe Chinese planners are becoming overconfident in their ability to design the future. There is a danger that they may overdo it."

Chinese media have reported that Beijing will convene a top-level conference this month when officials may announce ambitious plans to build more than 20 "city clusters" and 10,000 new townships nationwide.

For a complete transcript of the Soros interview, including his opinions on gold, the RMB and the new Chinese leadership, please click here