China risks a crisis similar to US subprime meltdown, says Soros

PUBLISHED : Tuesday, 09 April, 2013, 12:00am
UPDATED : Tuesday, 09 April, 2013, 5:04am

Billionaire investor George Soros said China has a "couple of years" to control risks from non-traditional 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 US that caused the financial crisis of 2007-2008," Soros said 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 could keep its current economic growth model "for another year or two, but not for another decade", as household savings were no longer sufficient to subsidise the majority of the economy, Soros said. The transition won't be easy, because less investment may result in slower growth and increase chances of a so-called "hard landing", he said.

The nation's new leaders including President Xi Jinping have pledged to rely more on domestic demand for growth after investment and exports fuelled expansion. Premier Li Keqiang said last month that the nation needs to maintain 7.5 per cent 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, which increased the risk of loan defaults, Soros said.