April 2016 – FINANCIAL MARKETS – According to Soros, March was a troubling month in China. The indicator is the growth of credit in the nation’s economy. The forecast for Chinese credit growth was an impressive 1.4 trillion yuan, but instead, the actual growth turned out to be 2.34 trillion yuan ($362 billion USD). The concern is that the Chinese government is prioritizing growth over debt, and allowing debt to spiral out of control. It’s a short-term way to keep people happy, but it leads to long-term consequences. In the United States, an eerily similar situation developed in 2007 and 2008, just prior to the Great Recession.
The debt that was accrued in the U.S. at that time was used to cover already bad and dying debts and enterprises. The same appears to be happening in China today. Soros has previously predicted that Asian markets would fare poorly, suggesting that decline is “unavoidable.” This is common sense for investors. China’s real estate is also on a bubble with home prices rising over 60 percent in some locations. This also happened in the U.S. prior to the crash.
With wages suppressed around the world, and with the wealthiest hoarding cash, the world’s people are increasingly relying on credit to sustain their lifestyles. Much of this credit is bad debt, it will not be repaid. Eventually, markets will agree that too many people owe too much money and credit markets will tighten. But because nearly all growth is now dependent on credit, such a tightening in credit will result in a virtually guaranteed recession. This is why the Federal Reserve Bank in the U.S. is reluctant to raise interest rates, doing so could derail the fragile economic growth in the United States. And the same could apply to China, which is allowing credit to grow too fast. If the Chinese economy suffers a collapse, it will undoubtedly impact American markets and could trigger a recession in the United States. –CO