19.02.2016 Author: Vladimir Terehov

George Soros on Chinese Economy

sorosAn interview, which George Soros, an international investor and trader, gave to Bloomberg TV on January 21 in the course of the World Economic Forum in Davos, where he shared his thoughts about fundamental trends in world economy, caused a major stir up in mass media around the world and in Russia. This time, though, Russia was not the main topic of the interview. In fact, it was not even mentioned in the header Bloomberg TV titled its interview transcript: George Soros Says China Hard Landing Inevitable, EU In Crisis, Beware QE Mistakes (of FRS policy), And More.

As for Russia, it was talked about, mainly, in the context of EU problems and in terms of which one of the countries will fall apart first in the course of a new stage of the global economic crisis, which was already evolving (in the opinion of the interviewee).

George Soros said that while the financial crisis of 2007-2008 was caused by a collapse of the US mortgage lending market, the current deterioration of the situation in the global economy is caused by the problems in the Chinese sector. He believes that these problems arose as an inevitable consequence of the economic growth model adopted by China in the recent years, which relies on a large-scale investment in the production facilities as well as on export of manufactured products.

It should be noted that in the context of growing wages of Chinese workers (who, naturally, are not very happy with the idea of boosting country’s power for low wages), the state regulation of exchange rate of yuan to the currencies of other major world market actors and, first of all, the US dollar, would be crucial to assure competitiveness of the export-oriented Chinese economy.

For as long as about ten years, the US has been accusing China of “manipulations” with the rate of exchange of its national currency, naming it as an alleged reason of the huge US trade deficit with China. Washington uses the undercutting of prices on Chinese products as the main argument in the polemic with Europeans in an attempt to persuade them that Chinese economy cannot be assigned the status of “market economy” in the current year (Market Economy Status).

George Soros believes that the “hard landing” of Chinese economy, which he not so much envisions, as actually already sees, is the result of problems accumulated in Chinese economy. In his opinion, massive capital flight from the country (by some estimates amounting to about 900 billion US dollars in the last year) and the cumulative state debt (which includes liabilities of the government, corporations and households) that exceeded 200% of the country’s annual GDP, are the key signs of Chinese “landing.”

Furthermore George Soros noted that China would survive the rough times in its economic life by digging into its reserves (estimated at around 3 trillion US dollars). But export of its problems to other countries along with its goods, paired with a drop in price of global energy supplies, might turn out to be a fatal combination for the world economy.

The official newspaper of Chinese Communist Party The People’s Daily was quick to respond to the epithet “financial predator,” which was used to describe the state of Chinese economy. In the article written by an expert of the Chinese Ministry of Commerce, titled “Soros’ Challenge against the Renminbi will not be Successful”, the Bloomberg interviewee was accused of making “speculations” about the problems with Chinese economy, instilling panic among traders and exacerbating fluctuation of the exchange rates of Asian currencies.

The author of the article noted that despite the rate of growth of Chinese economy slowed in 2015 and yuan gave ground to US dollar, Chinese economy “looks fairly good in comparison with other large states.” The growth rate was twice as high as that demonstrated by the US and volume of export dropped only by 1.8%, which was almost nothing to compare to the 10% drop in the global trade in 2015.

The article says that China’s macroeconomic stability is significantly higher than that of the rest of the countries of the BRICS and other large world states and if to consider a stable domestic policy situation, “an economic turmoil cannot completely devastate China.”

The conclusion of the article is rather puzzling and is expressed in just one statement: “declaration of war by Soros” to Asian currencies creates an opportunity for China to further enhance financial cooperation with East Asia and boosts prospects of financial cooperation within the framework of the One Belt, One Road initiative. 

Rather optimistic disposition of Christine Lagarde, the Managing Director of IMF, in respect of the short-run prospects of Chinese economy is quite remarkable. Speaking on February 3 at the University of Maryland, she first reminded that for some years now they had been talking about a “hard landing” of Chinese economy and then expressed confidence in China’s ability to complete its economic transformation and called upon it to continue promoting market reforms.

Lagarde had solid grounds to make such statement, as on November 30 of the last year, at the meeting of IMF’s Executive Committee, which she chaired, a decision was taken to give the yuan the status of reserve currency, making it the fifth currency of the IMF basket along with the US dollar, the euro, the English pound and the yen. Moreover, the yuan’s share in the basket will be 11%, making it the third most powerful currency (after the US dollar and the euro). Announcing this decision, Lagarde called it “an important milestone in the integration of the Chinese economy into the global financial system.

Commentators of George Soros’ interview also highlighted that it coincided with the triumphant tour of the General Secretary of the Communist Party of China Xi Jinping across the three leading countries of the Greater Middle East, which the US watched with jealousy.

And Washington had reasons to be nervous, for the results of the tour undertaken by the leader of the US’s chief opponent are in a sharp contrast with that mess, which the clumsily maneuvering “global ‘hippopotamus'” have been leaving behind in the delicate Middle Eastern “china shop” for the last 15 years.

Nevertheless, though George Soros can hardly be viewed as an objective and politically unbiased expert, it would not be wise to simply dismiss his perception of the situation described in the interview to Bloomberg TV. As early as this year, watching the development of the situation in the Chinese and global economy, we will have an opportunity to see whether the instinct of one of the prominent and most experienced traders proves to be true or not.

Vladimir Terekhov, expert on the issues of the Asia-Pacific region, exclusively for the online magazine “New Eastern Outlook.”

Please select digest to download: