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Alternative Market Briefing

Stanley Druckenmiller: Expansion in credit during slower GDP growth is a problem for China

Tuesday, June 25, 2013

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Stanley Druckenmiller
Benedicte Gravrand, Opalesque Geneva: - In its latest Equity Research report, Goldman Sachs examines the rising cost of growth in China and Asia, which is hurting profits and returns. The authors, Hugo Scott-Gall and Sumana Manohar, ask two questions, namely, who does China need, and who needs China. "The answer to the first is solutions providers to the rising costs and constraints (e.g. energy efficiency, food science, shale expertise)", the report states. "Second, for those who need China, for either low-cost goods or capital (i.e. debt heavy, consumption-driven economies) or to buy hard commodities, the future maybe tougher, while those who rely on China as a source of export growth need to ensure that domestic competition won’t undermine them."

Stanley Druckenmiller, chairman and CEO of Duquesne Family Office (which used to be Duquesne Capital Management from 1981 to 2010), tells Goldman Sachs in an interview that the problem in China is in its expansion in credit just when the GDP growth is slowing down. He believes it is all due to the 2009-11 stimulus, which slowed down future growth by crowding out more productive investments.

"The system’s building enough leverage and misallocation of resources to warrant risks of a financial crisis," he adds, although the timing of such an event is uncertain. The credit growth outpacing economic growth that we see in China sinc......................

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