China's "shadow banking system is growing out of control" warns legendary financier George Soros. The 81-year-old Hungarian-American says the Chinese government "made a mistake not allowing its currency to appreciate" as that has pushed up the local cost of imports like oil. That could cause a "wage-price spiral".
And while he praised the Chinese government's success in stimulating the economy after the crisis, he thinks they will have a much harder time trying to "rein it in" now. "Big banks under direct control are (following government instructions) refusing to lend" but unofficial "shadow" lenders are harder to stop.
Soros has a controversial investment track record. Dubbed "the man who broke the Bank of England" after successfully betting against the UK government's attempts to peg sterling in 1992, he was also accused by the Malaysian Prime Minister of exacerbating the Asian crisis in the late 90s. Yet his repeated success he has built a $15bn fortune from relatively humble beginnings and his history of good calls he predicted the 2008 crash make him a man worth listening to.
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He admits that the "Chinese approach" of heavy state involvement and tight capital controls has worked well in recent years but says other countries would be "mistaken" to follow their example. "Their system is a real contrast to the international capitalism of the Washington consensus."
Soros accepts that those controls helped China avoid the "excessive expansion of credit and leverage" that caused the crisis. But says that the strategy would be less effective if "they were not the only ones doing it". He also argues the major reason for their success was that "they were the beneficiaries of globalisation". He noted that "circumstances" change and the decision of countries like Brazil to restrict inflows of capital would "not be good for Brazil or the world economy".
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