George Soros says stop worrying about the Euro-zone and look at the slower growth in China. The hedge fund boss, who built his fortune betting on the world’s money markets, is concerned that twenty years of rapid growth is about to run out of steam.
Signs that the second-largest economy in the world is slowing have caused the price of many commodities to fall and helped break a 12-year bull run for gold. Beijing’s move to cut back on corn imports made the grain the worst-performing commodity last year, as it fell almost 40%.
Soros, who famously bet against the strength of the British pound in the European exchange rate mechanism and won during 1992’s Black Wednesday debacle, will be a prominent figure at the World Economic Forum in Davos, Switzerland, later this month, when policymakers and business people debate how to foster global growth.
In London’s financial district, the Square Mile, a brief glance at the stock market shows the impact of a slowdown in Chinese manufacturing output last month — and the fear that this will become protracted. The FTSE-100 is down 30 points since the New Year break. It includes mining companies such as Rio Tinto and Anglo American, which have strong links to the Chinese economy.
Predictions that China’s economy lost momentum in the final quarter of last year were underscored by figures showing that the manufacturing sector grew at a slower pace last month as export orders weakened. Official figures can say whatever the Chinese authorities want them to say, but there is widespread agreement that the economy is suffering a longer-term slowdown.
Mark Williams at think tank Capital Economics said the news that China has a 3 trillion local government debt mountain would fuel the fear.
“Activity among large firms has turned down again and is likely to cool further as policymakers rein in local government debt. We therefore expect China’s economy to slow again this year,” Williams said.
Soros bluntly states that three years of worrying over the Euro-zone should give way to worrying about China. It is not that he believes a solution has been found to the debt mountains in parts of Europe; it is just that he thinks the Euro problem has reached a plateau, while China could be on the skids.
“The major uncertainty is not the Euro, but China. The growth model responsible for its rise has run out of steam,” Soros said.
Until recently China has thrived by restricting households’ spending, effectively forcing them to save. The savings are channeled into industrial production. Foreign exchange built up in the boom years has mostly been invested in international expansion, in Africa and in parts of Asia neglected by Japan.
The financial crisis showed the weakness in the idea of becoming the workshop for the world when that world could not afford to go on buying. To keep the wheels turning, local authorities and other government agencies were allowed to borrow.
Last year, the Chinese leadership said it recognized that plan was flawed and public sector debt needed to be cut, but when the economy slowed dramatically after borrowing was restricted the policy was quickly reversed.
“China’s leadership was right to give precedence to economic growth over structural reforms, because structural reforms, combined with fiscal austerity, push economies into a deflationary tailspin, but there is an unresolved contradiction in China’s current policies: restarting the furnaces also reignites debt growth, which cannot be sustained for much longer than a couple of years,” Soros said.