Weak world markets signal fresh global crisis

American financier George Soros warned Thursday that weaker world markets, triggered by a slowdown in China, were showing signs of a financial crisis reminiscent of the 2008 crash.

Speaking at an investment forum in Sri Lanka, the magnate and philanthropist said China's flagging economy and subsequent devaluation of its currency were undermining global financial stability.

His speech came as world markets tumbled and oil prices reached new lows after China suspended its stock market when shares fell more than seven percent for the second time this week.

"Unfortunately China has a major adjustment problem and it has a lot of choices and it can actually transfer to the rest of the world its own problems by devaluing its currency -- and that is what China is doing," Soros said of the number-two economy.

A weaker Chinese yuan was "inflicting deflationary pressures" on the rest of the world, he told the Sri Lanka Economic Forum, attended by President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe.

"We are facing a very serious transitional problem which is quite recent and it is, I would say, (something) that amounts to a crisis and we are at the beginning of that," Soros said.

"When I look at the financial markets, there I see a serious challenge, which reminds me of actually the crisis we had in 2008."

The Hungarian-born multi-billionaire said he had warned his investment staff to play it safe.

"In my guidance to my investment people, I have been telling them to be very, very cautious and very, very, very careful."

Soros warned that current deflationary pressures could lead to a downward spiral.

While falling prices might be good for consumers in the short term, deflation can endure dangerously if consumers delay purchases in the hope of lower prices later, which in turn prompts companies to hold off investment.

"Instead of spending that (saved) income, they will use it to reduce their indebtedness because they can buy goods that they want cheaper next near than this year," he told the forum.

"Cash becomes the desirable form of investment and that is very bad for the financial markets. And the banking system that has been lending a lot of money to the developing world is now pulling back."

He urged Sri Lanka, which is emerging from a decades-long ethnic war, to lower its expectations of foreign capital "pouring" in, and work more to strengthen its economy.

"I am afraid, I have to be a messenger that delivers bad news because you are facing a very difficult external situation," he said.

Photo: Hungarian-born US magnate and philanthropist George Soros attends an economic forum in Colombo. (AFP/Channel News Asia)