Soros: China's Future Path Is 'Major Uncertainty Facing the World'

Tuesday, 31 Dec 2013 06:56 PM

By Dan Weil

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How China decides to approach the tension it faces between sustaining rapid economic growth and amassing a major debt burden represents the key global issue facing the world today, says hedge fund legend George Soros, chairman of Soros Fund Management.

"The major uncertainty facing the world today is . . . the future direction of China," he writes in Economia.

"The growth model responsible for its rapid rise has run out of steam. That model depended on financial repression of the household sector, in order to drive the growth of exports and investments."

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That means consumers account for only 35 percent of GDP, Soros notes. "Its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing."

The debt explosion makes China look a bit like the United States prior to the 2008-09 financial crisis, Soros argues.

"But there is a significant difference, too," he writes. "In the U.S., financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises."

The People's Bank of China took action in 2012 to stanch the debt growth, but the government stepped in this year when the economy started to slow down, forcing the central bank to ease and restarting the steel furnaces, Soros explains. The economy quickly turned around.

"The Chinese leadership was right to give precedence to economic growth over structural reforms, because structural reforms, when combined with fiscal austerity, push economies into a deflationary tailspin," he writes.

"But there is an unresolved self-contradiction in China's current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years."

How China addresses that contradiction is of great importance for the world, Soros contends.

"A successful transition in China will most likely entail political as well as economic reforms, while failure would undermine still-widespread trust in the country's political leadership, resulting in repression at home and military confrontation abroad."

China's cabinet estimates that the country's economic growth will total 7.6 percent for 2013, down from 7.7 percent in 2012. That would represent the third consecutive year of decline.

"We cannot deny a downward pressure on economic growth," Xu Shaoshi, minister in charge of the National Development and Reform Commission, told legislators in a briefing on the report, according to the Xinhua News Agency.

A Bloomberg survey of economists produced a median growth forecast of 7.4 percent for next year.

Meanwhile, the European Union is moving on a path toward long-term stagnation, Soros says.

The European Union "has now been transformed by the euro crisis into a relationship between creditor and debtor countries that is neither voluntary nor equal," he says.

"Indeed, the euro could destroy the EU altogether."

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