Soros, Others Sound Alarm On China

Is China looming as the biggest threat to global economic stability?

One fairly smart investor, by the name of George Soros, thinks that could be the case and so do several other seasoned observers.

The New York Times reported on Thursday (Sept. 8) that China may be overextending itself amid a debt load that, as recently as last year, stood at more than $26 trillion, and that’s up five times above 2005 levels. Soros has said such leverage echoes and presages a crisis that may be as severe as the one seen in 2008.

NYT noted that the debt that may be a ticking time bomb is housed in China’s corporate sector. The biggest companies in the country have taken on the bulk of the debt, and that means the debt must be serviced, leaving less on the table to invest in growth opportunities, such as equipment or hiring. Without growth, profits stall, and as profits stall, less money is there to pay back loans. If there is less money to pay back loans, bad debt rises, and banks shy away from lending, which, in turn, dampens the economy.

However, one economist with HSBC, Qu Hongbin, said that Chinese firms and individuals have, in fact, held onto more cash, relatively speaking, than has been seen in other nations. Others say the government would act as a backstop in any financial crisis, with state-run banks having issued the debt. In addition, loans have largely been kept on the domestic front, which gives at least some insulation from volatility and creditor demands outside the country’s borders.

Nonetheless, the heady pace of lending has not translated into economic growth. In an interview with NYT, Brandon Emmerich, general manager of data firm Wind Information, said that $4 of new credit must be extended within China to generate a singe dollar of GDP. His own analysis of corporate bonds showed that 42 percent of funds raised since last year have been used to pay off loans that come due or bonds that are scheduled to expire, up from 8 percent the year before.


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