A Billionaire's Take on the China Theme

George Soros and other influential voices at the 2012 World Economic Forum found China at the center of financial discourse

 

Caixin: You experienced the Asia financial crisis and now we are in the middle of the euro debt crisis. What are the differences?

George Soros: Actually, there is a remarkable similarity – a weakness in the structure of the world. The countries that became heavily indebted in euros turned out to be in a similar position to the Asian countries that became heavily indebted in U.S. dollars.

Both are borrowing in a foreign currency. You see, this is something that I didn't realize until recently: The euro is not controlled by individual countries. They have no control over issuing the currency. They are in the same position as a third-world country borrowing in a foreign currency.

And in the case of Asian countries, it was the IMF that imposed strict fiscal discipline. In the case of European countries, it was Germany that was fulfilling the same function. And that policy of strict fiscal discipline is counterproductive because it pushes the country that is heavily in debt into a recession, while the debt burden actually increases. And that is what's happening in Europe.

Caixin: When a financial crisis arrives, people claim there are two forces at play: One is from rational market investors, the other is from speculators. In terms of the euro crisis, which is the dominant force?

Soros: I believe that it was mainly caused by a lack of understanding about how financial markets really operate. European authorities have had very little interaction with the market, little experience. So financial authorities in the Anglo-Saxon world understand markets better than continental Europeans.

I gave a long list of mistakes made by European authorities in dealing with the Greek crisis, always doing too little too late. That's what aggravated the crisis. To me, it's very convincing.

Caixin: You said previously there should first be fiscal consolidation in the wake of the euro crisis, then restructuring. What else is needed?

Soros: Fiscal discipline at a time of economic decline creates this deflationary spiral. But given the fact that Germany does not want to be the deep pocket, financing other countries, you can't avoid first imposing fiscal discipline. Then, you must find a way to exit this vicious circle. And this cannot be done by the individual countries.

Keynes would have argued that creditor countries should stimulate their economies to offset recession in debtor countries. Now, the biggest creditor country, Germany, is obliged by its constitution to balance the budget. Therefore, it cannot stimulate.

The only possibility for stimulation has to come from the European Union. It has to be underwritten, supported or guaranteed by all member countries acting jointly and that means some kind of euro bond. Which is of course something that (German Chancellor) Angela Merkel is opposed to.

Caixin: How big is the likelihood of the euro falling apart?

Soros: The euro cannot fall apart because, if it did, the consequences would be catastrophic, because financial assets are intermingled based on a common currency. And if they became separated and had different values, you wouldn't know whether your counterparty was bankrupt or not. So it would be a dislocation that would be out of control.

What is happening now is that, increasingly, the financial system within the euro zone is being re-nationalized, so that most of Italian bonds are being held by Italian banks, Spanish bonds by Spanish banks, and so on. If that goes on for an extended period, it becomes possible for the euro to fall apart.

Caixin: What will we do if the worst-case scenario happens?

Soros: Well, we are moving in that direction. And of course there have been currency unions in the past that fell apart. For instance after the First World War in the Austro-Hungarian Empire, Czechoslovakia, Hungary and Austria each had a separate currency.

But in the present phase, where German banks and French banks have a lot of Italian and Spanish bonds, and German banks have claims against Spanish companies and so on, to break up this union now would be catastrophic. You can't unscramble an omelet. Once you have mixed the eggs together, you can't separate them again. This is actually in a very gradual way happening, slowly.

For an Italian bank to borrow from the central bank at 1 percent, and buy Italian bonds at 6 percent is very good arbitrage, and without risk. Because if Italy fails, then Italian banks would fail also, whether they have the bonds or not. So for them, it's riskless. For a German bank, it would be very risky. So right now, the financial system of the euro zone is being unscrambled.

Caixin: It seems you are very concerned about the role of international financial institutions such as the IMF. What kind of role can it play, and what kinds of reforms should IMF undergo?

Soros: Actually, the IMF right now is playing a very good role. First of all, it has substantial financial resources because as a result of the London G20 meeting in 2009, there was a US$ 1 trillion recapitalization.

The economists at IMF understand that the policy advocated by Germany is counterproductive. So they keep warning Europe against the policy that Germany is advocating. And I think that's very healthy, very positive.

Caixin: What role do you think China should play on the international financial stage in, for example, the euro crisis or an even greater crisis?

Soros: China has become one of the few positive forces in the global economy, a motor moving the economy forward. Not a strong motor, because it's much smaller than the United States. But it's wanted because of its (foreign currency) reserves and ability to stimulate the economy.

China can move the economy, the global economy, forward. But the (Chinese) leadership does not want to take responsibility for the global system. They say that China is a developing country, has got many problems on its own, and cannot take on an addition of the global system. (This is) very similar to the position that Germany is taking, not wanting to accept responsibility for the rest of the euro zone.

So within the small euro system, Germany is the main creditor. In the global system, China is the main creditor. And the creditors don't want to take responsibility for preserving the system.

That is the point that Keynes made many years ago: That creditors are equally responsible if there's an imbalance, not only debtors. If you only punish the debtors and don't stimulate the creditors, then the world goes into deflation. So in different contexts, we are replaying the problems of the Great Depression. We haven't learned the lessons that John Maynard Keynes taught us about deflation.

Caixin: What do you think about the yuan's internationalization progress?

Soros: That is moving forward very rapidly because European banks had been the main suppliers of credit to the world.

In the first quarter 2011, European banks had lent the developing world US$ 3.7 trillion. American banks lent US$ 1.5 trillion and Japanese banks lent something like US$ 700 billion.

So out of over US$ 5 billion in lending to the developing world, more than two-thirds came from European banks. That, of course, included banks based in London. The French banks, for instance, were very big in financing international trade. And because of the euro crisis, the banks were short of capital and had to shrink their balance sheets. That created a lack of financing for international trade.

So a lot of trade started shifting from dollars to being financed by offshore yuan based in Hong Kong. Actually, the Hong Kong market was rising, and was growing very rapidly. There has been a considerable slowdown in the last few months, and I don't know whether this is due to developments in the Chinese economy, or the fact that European banks now have access to credit from the European central bank. But the credit crunch for the European banking system has now eased.

Caixin: But the yuan is not fully convertible yet. How would that impact its path to internationalization? 

Soros: It's very indirect because the mainland yuan is separated from the offshore yuan. But there are interconnections. There was a Korean market, and there has been some more or less black market capital moving into China, which then because of the credit crunch in Europe left China, and it may or may not have coincided with the collapse of the Chinese real estate bubble. Whether there is a causal relationship as well is something that needs a lot of research. But I suspect there is a connection.

Caixin: Emerging markets weathered the storm relatively well. What kinds of risks do you think are ahead for emerging markets, perhaps from a so-called global imbalance?

Soros: Well, the developing world has done much better, mainly because of stimulation from China. Brazil could sell its food to China and could borrow a lot of money very cheaply to develop oil reserves in remote areas. It's very expensive. Brazil's economic growth is fueled by trade and investment with China.

The same is true in Africa. A lot of capital has gone into Africa, and if China now becomes more cautious because of the decline in exports, decline in its export surplus, that could have negative effects on Africa and Latin America.

Caixin: "State capitalism" was a buzz word at Davos this year. Some think China's economic achievements prove the success of state capitalism. How would you compare state capitalism to liberal capitalism?

Soros: First of all, as an individual, I'd hate to be subjected to the bar of the state, that my existence should be determined by the state. And if it were subject to that power from another state, like China, I don't think I would like that.

I don't think state capitalism is a very attractive form of capitalism. It has been very successful in China, but I very much hope that China will continue to develop and pass that phase as it develops, and begin to respect the freedom of individuals more. And I think the Chinese people feel the same way.

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Car rentals switch up several gears

Guoxin Vehicle Leasing, a major car-rental company in Hangzhou, thecapital city of East China's Zhejiang province. Car leasing in China saw aboom during the three-day Mid-Autumn Festival in September and theseven-day National Day Holiday that started on Oct 1. Provided to ChinaDaily

Demand cannot match supply, say international and domestic companies in the auto-hiremarket

SHANGHAI - Shanghai-based office worker Chen Hao thought his plan with his friends wasperfect. He would fly to Nanning, in Guangxi Zhuang autonomous region, then rent a car thereto drive around the beautiful tourist city during the week-long National Day Holiday from Oct 1to 7.

However, the only problem for the 26-year-old travel-lover, who obtained his driving license justthree months ago, was that there were too many people in China harboring a similarly "perfectplan" to his. And, apparently, they had been quicker off the mark.

"I had settled everything and visited the rental company two weeks before the holiday, which issufficient even for a train trip, usually the most crowded one," said Chen. "It just never occurredto me that the (car rental) market was so hot."

As a result, Chen gave up his plan because the "perfect" car at a "perfect" rental price, aVolkswagen Polo for 129 yuan ($20.20) a day, was no longer available, and the budget travelerwas not willing to pay as much as 50 percent more to make his trip "perfect" as planned.

Fueled by millions of young backpackers like Chen, and perhaps, an equally large number ofpeople who work away from their hometowns and who also feel like driving back, the Chinesecar rental market saw a boom during the three-day Mid-Autumn Festival in September, atraditional holiday for family reunions, and the National Day Holiday.

"We doubled our car fleet to more than 1,000 vehicles this year in China. But, still, supply isgreatly outnumbered by demand," said Terence Chiu, general manager of Avis Car Rental inChina.

"Before the Mid-Autumn Festival, bookings flew in a week in advance. With the NationalHoliday, 70 percent of our cars were booked two to three weeks in advance," Chiu added.

Domestic car rental companies have experienced similar results as international firms. Theyhave been more aggressive in their marketing strategies and expansion in recent years,launching advertising campaigns at places including metro stations and central office buildingsmonths ahead of the two neighboring holidays.

Bookings with Shenzhou and eHi Car Service, two of the major players in the market, showedthat during the Mid-Autumn Festival, all cars costing no more than 200 yuan a day to rent werefully booked. Just before the National Holiday, budget cars at these companies, such as theMazda 2 and BYD FO, were no longer available.

"Now even my friends are coming to me to rent an inexpensive car, but all I can say is, 'Sorry,you have to wait'," Chiu from Avis told China Daily.

Along with the soaring demand, the price of car rentals is, unsurprisingly, also climbing.

According to a salesman with eHi Car Service in Shanghai who declined to give his name, therehas been an average of 50 to 60 percent rise in rental fees. With some popular car types, theprice has even doubled.

Cars have to be leased for at least three days during the National Day Holiday, according tothe terms and conditions on the official website of Shenzhou and eHi.

Despite the higher threshold, customers are not being deterred.

"In the past, the most popular cars were usually economy vehicles with the lowest prices," saidShao Wei, a senior executive with eHi Car Service. "But in recent months, safer and morecomfortable cars are gradually gaining momentum, especially among young urbanites, whohave learned from experience to trust the new industry."

One of the major driving forces behind the industry's growth is increasing investment fromventure capitalists into the capital-intensive business. This has allowed rental companies to buymore new cars and launch wider promotions.

"Basically, it's a market in which no one knows its limit," said Chiu from Avis. "The currentsituation here is however many cars you can provide, the market can take them all."

Chiu suggested that over the next five years, Avis is planning to invest a minimum of 3 billionyuan in the Chinese market, expanding both its locations and rental car fleet to 10 timescurrent numbers.

Although the short-term rental service, mostly from individual customers, accounted for 25percent of the company's business in China, Chiu believes there is a huge potential that couldbe, and may continue to be, the real reason for the strong growth of the market.

There is a wide gap between the ever-increasing number of driving-license holders and thenumber of civilian automobiles restricted by the government, the limited road space and risingfuel costs.

Statistics from the Ministry of Public Security showed that, by 2010, there were 150 milliondriving-license holders in China and, in the coming years, the number is likely to increase at therate of 20 million a year.

In contrast, metropolises such as Beijing and Shanghai are introducing a number of toughpolicies including limiting purchases of new cars through a sales quota system and carregistration plate auctioning.

According to a report issued by the international consulting firm Roland Berger, in 2010, thecar rental industry in China achieved an annual turnover of 18.2 billion yuan. By 2014, it isestimated that the market would have more than 400,000 cars and produce 38 billion yuan inannual revenues.

China Daily

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China is player to watch in tech R&D

China is evolving from the world’s factory to a crucible of innovation, rapidly approaching a world-class level in terms of both quantity and quality of research carried out. This carries profound implications for the competitiveness of Korea’s main industries and so-called growth engines. 

The big strides in China are in response to the government’s push to nurture indigenous innovation in order to end dependence on foreign technology and to help shift the Chinese economy into more capital and technology-intensive industries. But the seeds of the R&D commitment were sown even before a national innovation development plan was unveiled in 2006. 

Since 2000, the nation’s annual investment in R&D has expanded by 23 percent. In 2011, China is expected to rank second in terms of R&D investment based on purchasing power parity. In addition, China is benefitting from the largest national R&D workforce in the world, 20 percent of the world’s total R&D brain power. 

In both quantitative and qualitative terms, China has shown an impressive performance in innovation. From 2007-9, the annual average number of Chinese articles published in international science and technology journals totaled 104,157, placing China second. As for the number of articles covered in the top 10 percent of international journals, China ranked fourth from 2007-9, up from 19th place in 1987-89. 

According to a Total Factor Productivity analysis of approximately 1,200 companies each from China and Korea from 2001-9, Chinese companies’ annual average TFP growth stood at 4.46 percent compared to Korea’s 3.36 percent. If we assume Korea and China’s productivity levels were equal in 2001, China’s TFP growth was 20 percentage points higher than Korea’s in 2001-9. Technological progress accounts for nearly 90 percent of the TFP growth in China but only 63 percent in Korea. In particular, China is rapidly closing the technology gap with Korea’s mainstay industries such as electronics and automobiles. In new promising industries such as pharmaceuticals, solar power and electric automobiles, China’s technological capability has already overtaken Korea, leading the global industrial trend. 

In the electronics industry, China has surpassed Korea in R&D investment. It also started to overtake Korea in terms of the number of Patent Cooperation Treaty filings in 2008. As for telecommunication equipment and smart home solutions, China is grabbing the lead in next-generation product development. And in the electric car industry, strong government support already has led to international standards being set by Chinese companies such as BYD.

Being sandwiched between advanced countries’ high-end products and emerging countries’ low-end products, Korea has tried to gain competitiveness advantages by maximizing its strengths as a “fast follower” that upgrades existing products but keeps costs in check. However, China’s low-price and high-quality products, thanks to its innovation capabilities, will likely enjoy an increasing presence in the global market and apply pressure on Korean products. 

In response to China’s innovation strides, Korea needs to reestablish a national R&D system geared to maximizing its technological competitiveness. Rather than pursuing quantitative competition, Korea should pursue qualitative competition by supporting “star companies” or “star researchers.” 

Meanwhile, by strengthening a link between R&D main performers such as universities, research institutes and companies, the utilization of research results should be significantly improved. Second, Korean companies quite simply need to outpace their Chinese rivals in the innovation race. Korea’s world-class operational technology and operating efficiency in mainstay industries need to be maximized and bold investments into future industries should be made. 

Lastly, Korean companies should explore ways to utilize China’s top personnel related to key technologies.

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China's Rise: A Shift in Global Influence

During the last three decades China's economy has grown at the phenomenal rate of 10% per year, sometimes even exceeding 12%. Can China maintain such high rates for at least another decade? I think it can. China is starting from a lower base, and its 1.3 billion domestic consumers will keep rates up because their disposable incomes are growing.

As its GDP has increased, China has become more assertive regarding international issues. Those countries on its periphery--Korea, Japan, Taiwan and the ten Asean countries (Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam)--have felt China's growing influence. When these states make policy decisions they now have to take China into account. There is no direct intimidation, but, by denying access to its huge consumer market, China can punish those who are against its interests. Therefore, none of these countries wants to be viewed as antagonistic. Increasingly, this same pressure is being felt worldwide: The balance of power has changed.

The U.S. realizes that China's status has grown and that its views must be accorded their due weight. Were it to feel slighted, China could make its displeasure felt by being uncooperative on international issues or policies that require its support.

Singapore has a special relationship with China. We are 75% Chinese. As our second language is Chinese, it is taught in our schools. Thus we share an ease in communication, which has been a factor in about 3,500 Chinese companies deciding to base their operations in Singapore--155 of which are listed on the Singapore Exchange. From Singapore the Chinese are able to study the region and eventually enter the markets of Malaysia, Indonesia, the Philippines, Thailand and Myanmar. Because Singaporean Chinese speak Mandarin, our businessmen, when investing in China, have found it easy to integrate China's workers with ours. But lest Singapore--or any other country in the area--forget that it is a smaller and younger country, Chinese officials obliquely remind ours that their written history goes back 5,000 years to 3000 B.C., leaving unspoken the question: "How old is your country?"

None of the countries on its periphery can resist the attraction of China's market. Slowly, but inexorably, we are being drawn into China's economic orbit. If you look at China's policies over the last three decades there is little doubt that it has every intention of bringing its three northern neighbors--Korea, Japan and Taiwan--as well as the Asean countries into its economic fold. Of course, at the same time we do enjoy benefits in trade and investment.

China is a political and economic power the region cannot ignore. But neither, indeed, can China ignore the U.S. Although it has a smaller population--310 million versus China's 1.3 billion--the purchasing power of Americans is many times that of the Chinese. There is still time for the U.S. to counter China's attraction by instituting a free-trade agreement with other countries in the region. This would prevent these countries from having an excessive dependence on China's market.

Unfortunately the U.S. Congress is against any new free-trade agreements. If the next Congress continues to oppose FTAs, valuable time will be lost, and it may be too late to try again. Congress must be made to realize how high the stakes are and that the outlook for a balanced and equitable relationship between the American and Chinese markets is becoming increasingly difficult. Every year China attracts more imports and exports from its neighbors than the U.S. does from the region. Without an FTA Korea, Japan, Taiwan and the Asean countries will be integrated into China's economy--an outcome to be avoided.

A considerable counterbalancing force would be to add India to the mix. Whether India would be willing to enter into an FTA with the U.S., Korea, Japan, Taiwan and the Asean nations is the question. Singapore has a free-trade agreement with India, but we are a small country, enjoy good relations with India and do not present a threat to either its export or import market. If India joined such an agreement the combined markets would be more than equal to the pull from China.

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Singapore’s Lee Rates China’s Leaders

Lee Kuan Yew, Singapore’s founding father and minister mentor, and the grand old man of Asian politics, is famously blunt with his views. All the more, it would seem, in supposedly private diplomatic conversations than in public.

Bloomberg News

Chinese Vice President Xi Jinping, left, with Singapore Minister Mentor Lee Kuan Yew on Nov. 14, 2010.

In one of the most blistering lines in a trove of diplomatic correspondence that has already produced a wealth of undiplomatic zingers, Mr. Lee was quoted in a June 4, 2009 U.S. cable released by WikiLeaks as telling U.S. Deputy Secretary of State James Steinberg that the North Koreans are “psychopathic types, with a ‘flabby old chap’ for a leader who prances around stadiums seeking adulation.”

In the same meeting, which took place on May 30, 2009 in Singapore’s Presidential Palace, Mr. Lee also held forth on China and its leaders. It’s fair to say they came off rather better in the minister mentor’s estimation. Some excerpts:

On Xi Jinping:

The Deputy Secretary asked if in the future a leader like Xi Jinping would continue the policies on Taiwan followed by Hu Jintao. MM Lee responded affirmatively. Xi is a princeling who succeeded despite being rusticated. When the party needed his talents, Xi was brought in as Shanghai Party Secretary. Xi is seen as a Jiang Zemin protégé, but in another three and a half years Jiang’s influence will be gone. The focus now is on maintaining the system. There are no more strongmen like Deng Xiaoping. Jiang did not like Hu, but could not stop him, because Hu had the backing of the system and he did not make mistakes.

On Wang Qishan:

MM Lee said Vice Premier Wang Qishan, whom the MM saw in connection with celebrations in May of the 15th anniversary of Singapore-China Suzhou Industrial Park, is an exceptional talent, very assured and efficient. Wang handled SARS superbly when he was in Hainan. He excelled in coordinating the Beijing Olympics. Li Keqiang may not get the Premiership and the Party is looking for a way to keep Wang on past his 65th birthday until he is 70. MM Lee said he had met first Wang back in the 1990s but had forgotten their meeting. This time when they met, Wang told Lee he had reviewed the records of all Lee’s meeting with Chinese leaders going back to the days of Deng Xiaoping to see how Lee’s thinking had developed. Wang told Lee he respects him as a consistent man.

On China’s Rise

MM Lee said China is following an approach consistent with ideas in the Chinese television series “The Rise of Great Powers.” The mistake of Germany and Japan had been their effort to challenge the existing order. The Chinese are not stupid; they have avoided this mistake. China’s economy has surpassed other countries, with the exceptions of Japan and the United States. Even with those two countries, the gap is closing, with China growing at seven-nine percent annually, versus two-three percent in the United States and Japan. Overall GDP, not GDP per capita, is what matters in terms of power. China has four times the population of the United States. China is active in Latin America, Africa, and in the Gulf. Within hours, everything that is discussed in ASEAN meetings is known in Beijing, given China’s close ties with Laos, Cambodia, and Burma, he stated.

MM Lee said China will not reach the American level in terms of military capabilities any time soon, but is rapidly developing asymmetrical means to deter U.S. military power. China understands that its growth depends on imports, including energy, raw materials, and food. This is why China is working with South Africa on the China-Africa Development Fund. China also needs open sea lanes. Beijing is worried about its dependence on the Strait of Malacca and is moving to ease the dependence by means like a pipeline through Burma.

On Young Chinese

MM Lee said the best course for the United States on China is to build ties with China’s young people. China’s best and brightest want to study in the United States, with the UK as the next option, then Japan. While they are there, it is important that they be treated as equals, with the cultural support they may need as foreigners. Why not have International Military Education and Training (IMET) programs for China? Why not have Chinese cadets at West Point alongside Vietnamese cadets and Indian cadets? America’s advantage is that it can make use of the talent of the entire world, as in Silicon Valley. China still tends to try to keep the foreigners in Beijing and Shanghai. MM Lee noted that his own experience as a student in the UK had left him with an enduring fondness for the UK. When he spent two months at Harvard in 1968, an American professor had invited him home for Thanksgiving. This was not the sort of thing that happened in the UK, and Lee had realized he was dealing with a different civilization. In the future, China’s leaders will have PhDs and MBAs from American universities, he predicted.

On Taiwan:

MM Lee said former President Chen Shui-bian had left Taiwan in a weak economic position, which had enabled President Ma Ying-Jeou to come to power with his pledge to strengthen the economy through means including expanding the three links with China. In Beijing, former President Jiang Zemin was wedded to his eight-point approach, but President Hu Jintao was more flexible. Jiang wanted to show he was a great man by solving the Taiwan issue in his lifetime, but Hu is more patient and does not have any fixed timeline. In Chinese domestic politics, Hu had wanted Vice Premier Li Keqiang from the Communist Youth League to emerge as his successor, not Vice President Xi Jinping, but Hu did his calculations and accepted Xi when it became clear that Xi had the necessary backing from the rest of the leadership. Similarly, on Taiwan, Hu will be pragmatic. It does not matter to Hu if it takes 10 years or 20 or 30. The key is building links with Taiwan. As in the case of Hong Kong, if necessary the tap could be turned off, he said.

In this context, MM Lee said, Hu could live with Ma’s positions on the ‘92 consensus and on not addressing the reunification issue during his term in office. What mattered to Hu was that Taiwan not seek independence. If that happened, China has 1,000 missiles and is building its capacity to hold the U.S. fleet at a distance. The implicit question for Taiwan’s leaders is if that is what they want, MM Lee said.

MM Lee stated that the alternative is Mainland investment in Taiwan stocks and property. The Mainland has already assured Hong Kong that it will help out economically. The Mainland has not said this to Taiwan, but the Mainland’s Taiwan Affairs Director, Wang Yi, did urge Chinese companies to invest in Taiwan. In four years Taiwan’s economy will pick up and Ma will win re-election. The DPP lacks strong potential candidates. Su Zhen-chang is promising, but seems unlikely to be able to win. Meanwhile, even the traditionally DPP-supporting farmers in Taiwan’s South need China’s market for vegetables and other products. Taiwan’s continued participation in the World Health Assembly depends on Beijing. Beijing’s calculation seems to be to prevent Taiwan independence in the near term, then bring Taiwan “back to China,” even if it takes 40 or 50 years. MM Lee said he is looking forward to visiting Fujian Province, where preparations are underway for a new southern economic area linked with Taiwan.

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