George Soros: China's debt binge resembles that in the US before the recession

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China, already heavily indebted, continues to accumulate debt at a rapid rate.

In March alone, total social financing — the broadest measure of credit growth that captures new lending from both traditional and non-traditional sources – rose to 2.34 trillion yuan, the second highest monthly increase on record, behind the enormous 3.425 trillion figure recorded in January this year.

To George Soros, the famed fund manager who rose to prominence by “breaking the Bank of England” in 1992, China’s recent credit splurge should be seen as a warning sign, suggesting at event in New York on Wednesday that it resembles what was happening in the United States in 2007 and 2008, just before a crippling financial crisis heralded the start of the great recession.

According to Bloomberg, Soros stated that it “eerily resembles what happened during the financial crisis in the US, which was similarly fueled by credit growth”, adding that “it can reach a turning point later than everyone expects”.

Soros told Bloomberg that capital outflows from China are a growing phenomenon driven by the nation’s anti-corruption campaign, which makes people nervous and spurs them to pull money out.

Despite a small $10.3 billion increase in March to $3.21 billion, it was partially due to revaluation effects due to weakness in the US dollar, something that helped increase the value of other currencies held as part of China’s foreign exchange reserves.

Even with that small increase, over the past 12 months China’s currency reserves tumbled by $517 billion in value.

The warning from Soros is unlikely to unnoticed in China if recent form is anything to go by.

After supposedly declaring “war on the renminbi” at the World Economic Forum held in Davos earlier this year — something that is disputed by some notable commentators who were there — China’s state-run media outlets launched a blistering attack on Soros, essentially blaming him for whipping up concerns over the nation’s economy that led to a sharp selloff in markets at the beginning of the year.

The People’s Daily newspaper warned Soros to not declare war on the nation’s currency, stating in a story entitled “Declaring war on China’s currency? Ha ha” that “Soros’ war on the renminbi and the Hong Kong dollar cannot possibly succeed — about this there can be no doubt”.

Given the remarks from Soros yesterday, one can’t help but think that a similar retort in the other direction cannot be far away.

Meanwhile China’s debt levels continue to grow, estimated by some analysts to now stand at over $30 trillion.

You can read more from Bloomberg here.

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