Paying silly prices, like Shanghai SIPG has for the Brazilian midfielder, is a sign of a bubble economy about to burst

Fine wines. Fast cars. Old masters. To the list of luxury goods that have been snapped up by China’s new rich, add Premier League footballers after Shanghai SIPG struck a deal to buy Oscar, Chelsea’s Brazilian midfielder.

A transfer fee of some £52m meant the west London club made a tidy profit on a player they bought for £19m four-and-a-half years ago, but has set alarm bells ringing in the Premier League.

The concern for Chelsea’s manager Antonio Conte and Arsenal’s Arsene Wenger is that there will now be an exodus of Premier League talent to Chinese clubs.

Observers of China’s economy are worried about the transfer deal for a different reason. Buying up “trophy” assets is the hallmark of a bubble economy and when the prices paid start to look silly it is a sign that the bubble is about to burst. Some might say that paying more than £50m for a player who can’t get a game in Chelsea’s first team and offering him £400,000 a week in wages falls into the silly category.

Dhaval Joshi, senior vice-president at BCA Research, said: “One defining feature of the last 40 years is a steady sequence of private sector credit booms which have inevitably turned to busts: notably, Japan in 1990, the Asian “tigers” in 1998, the US in 2007, and the UK, Spain and other European countries in 2008.



“In this defining feature, China’s is the last of the major credit booms that hasn’t turned to bust – yet.”

The pricking of an asset-price bubble is always the last chapter of a story that starts promisingly. By the time Japan’s property boom peaked, the value of the grounds of the imperial palace in Tokyo was allegedly greater than that of the whole of California. Yet the bubble was the culmination of a prolonged period of strong growth that saw Japan’s economy rebuilt after the devastation caused by the second world war.

Similarly, there was an explanation for the bidding up of technology stocks during the Dotcom bubble of the 1990s. There were real digital breakthroughs happening, but easy credit meant the boom got out of hand.

China’s economic transformation since the reforms introduced by Deng Xiaoping in the late 1970s has been remarkable. According to the World Bank, growth has averaged 10% a year and more than 800 million people have been lifted out of poverty. Fortunes have been earned, with Deloitte noting that there are now more billionaires in Beijing (100) than in New York City (95).

After three decades of rapid expansion, China’s economy was showing signs of overheating when the financial crisis began in 2007. But its export-dominated economy was vulnerable to the collapse in trade and industrial production that followed the demise of the US investment bank Lehman Brothers.

The government in Beijing, fearful that economic hardship would lead to political unrest, eased policy aggressively. Banks were flooded with cash and there was an extensive programme of public works. Not all the money was well spent. Roads were built that were not needed, ghost towns were constructed, factories that were unprofitable were kept open. And with fewer good bets to back in the real economy, investors awash with cash discovered the joys of asset speculation.

They have developed a penchant for western brands. In the UK Chinese investors have snapped up prestige names including Sunseeker motor yachts, Hamleys and House of Fraser store groups and the Odeon cinema chain. In recent days they have agreed to hand over £97m for the loss-making Aquascutum label and earlier this month a Chinese government-backed investment group, Sinofortone, bought the Plough at Cadsden – the Buckinghamshire pub where David Cameron once shared a pint with China’s president, Xi Jinping.

Four Midlands football clubs are already owned by Chinese investors – West Brom, Wolves, Birmingham City and Aston Villa – while Sinofortone has been linked with a possible bid for Liverpool FC.

By 2013, the limits of China’s “expansion at any cost” approach had been reached. Beijing started to restrict credit growth and the focus shifted towards the need for slower but better-balanced growth.

But since then, policy has zigzagged as policy makers have tried to get the balance right. Laura Eaton, an economist at the consultancy Fathom, said that earlier this year the authorities “threw in the towel” when the economy slowed by more than expected and reverted to stimulus.

But the policy shift was relatively short-lived because Beijing is worried by the risks associated with another boom. Bank lending growth has peaked, the property market has slowed, and fiscal policy has become less supportive. Andrew Kenningham of Capital Economics says this should result in economic growth slowing from around 6% in late 2016 to an average of nearer 5% in 2017 but he doesn’t expect a “hard landing”.

Joshi’s analysis suggests that Premier League managers should not worry too much about a mass exodus of their star players, pointing out that Beijing’s balancing act cannot go on for ever.

“Admittedly, the ability of the Chinese authorities to ‘extend and pretend’ is probably greater than elsewhere in the world, and this might prevent another violent tipping point.



“Irrespective, the debt super cycle is over when the cost of malinvestment and misallocation of capital outweighs the benefit of good credit creation. With private sector indebtedness (including state owned enterprises) now at, or beyond, the level where every other credit boom peaked, China appears to be approaching this point.”