Monday, November 23, 2009

George Soros On China: U.S. Can Help Score a Win for China

If you read this through and like it, email me, or leave a comment if you want the whole pdf. I can email it to you. dcrets [at] iirusa [dot] com

It's too bad that none of the major "western" news organizations wrote about some of the great comments George Soros made recently about China's new power in the global economy. Maybe President Barack Obama would not have appeared so passive in front of the Chinese delegation who welcomed him on his first visit to the Middle Kingdom.

Under reported -- to the detriment of financial executives everywhere -- is a series of lectures George Soros has been giving around the world about what he considers to be the true implications and opportunities created by the economic collapse and the seizing up of the credit markets after the Lehman Brothers collapse.

The only good story that I have seen so far on the issue is by a former student colleague I worked with at the University of Hong Kong, Vivian Kwok, who now works at Forbes.

She points out that Soros, a billionaire, worth something like US$11 billion, who escaped the Nazi death squads in Budapest, Hungary during World War II, just made a spent a combined US$126 million on subscriptions for new shares of China Minsheng Bank and Longfor Properties in their initial public offerings in Hong Kong.

But his real achievement to date is a series of lectures where Soros is calling out the G20 countries, but especially the United States, for not only precipitating the failure of the economy, but not doing enough to embrace new partners in re-establishing a global economic order. Partners like China, for example.

Despite doing what almost all of the Bretton Woods Agreement and Washington Consensus countries have done, propping up the financial system by offering massive loans to banks with balance sheets saturated with questionable assets and liabilities, the United States and other G20 nations stand to lose ground significantly during the economic recovery if they do not make partnerships and reformulate the IMF and World Bank strategies to foster new power positions for emerging economies. Why? As of September 2009, China owns US$789 billion of U.S. Debt

On Oct. 30 Soros gave a lecture called "The Way Ahead, Comments On China" at Central European University that clearly delineates a new policy agenda for the United States and the Bretton Woods countries.

Soros claims that "the Washington Consensus [of keeping global capital moving around the world] has failed". New potential leaders of the global economy stand to benefit from a failure of this fundamentalist strategy of globalization, and:

The United States stands to lose the most, and China is poised to emerge as the greatest winner[...]China has discovered a remarkably efficient system of unleashing the creative, inquisitive and entrepreneurial activity of the people who are allowed to pursue their self-interests, while the state can cream off a significant portion of the surplus value of their labor by maintaining an undervalued currency and accumulating a trade surplus.

China can either spread the use of state capitalism to the detriment of the global economy, or they could work in a multilateral system to further a kind of hybrid internationalist system of economic and financial markets regulation.

China could help re-write the rules on financial regulation, introducing a new role for emerging market countries, who have until now suffered the brunt of, ironically, the speculation against currency led by people like Soros, causing massive loans given out by the World Bank and IMF, offering sometimes impossible terms of agreement, and further troubles.


That is what a new Bretton Woods conference could accomplish in one fell swoop. It would reconstitute the IMF to better reflect the prevailing pecking order among states and revise its methods of operation. It would decide how to treat financial institutions that are too big to fail and it would consider new rules to control capital movements. The total freedom of financial capital to move around internationally has proved to be a source of instability and needs to be curbed.

The process needs to be initiated by the United States, but China and other developing countries ought to participate in it as equals. They are reluctant members of the Bretton Woods institutions which are dominated by countries that are no longer dominant. The rising powers need to be present at the creation of the new order to ensure that they will be active supporters of it.

BIG PROBLEM, though, credibility and relationship trust-wise: China has engaged in somewhat unsavory behavior by getting into relationships with countries isolated form the world community of nation-states that formerly led the now defunct Washington Consensus -- countries like Burma, North Korea, and now Guinea, whose leader Moussa Dadis Camara is accused of directing soldiers to shoot into a crowd of opposition supporters during recent elections.

There is hope:

Why should China submit to a new multilateral system in view of the fact that it is set to emerge as the winner from the current turmoil? The answer is equally simple. In order to continue rising it must make itself acceptable to the rest of the world. That means that it must move towards a more open society, combining an increased measure of individual freedom with the rule of law. Given the current military power relations, China can continue rising only in a peaceful environment where the rest of the world willing accepts the rise of China.

That last bold statement for emphasis? Well, I don't see that happening. Soon. Even though, as Soros admits earlier in the lecture, keeping things in their current state is in itself still a threat to the stability of the Communist Party's rule.

At the same time, an international system based on state capitalism would inevitably lead to conflicts between states. The first signs of conflict are already beginning to surface because, ironically, China is repeating the mistakes of the colonial powers in dealing with the countries that are rich in natural resources just at a time when the colonial powers have learned from their past mistakes and are trying to rectify them. In order to gain access to natural resources, China is dealing with the rulers and neglecting the people. This helps oppressive and corrupt regimes to stay in power. This is an undesirable outcome but China is not the only one to be blamed for it. When a Chinese company tried to buy Unocal, it was rebuffed. And more recently, Rio Tinto reneged on a deal to sell an interest to a Chinese company. This has pushed China into dealing with those countries that the international financial institutions have shunned—Burma, Sudan, Zimbabwe, the Congo and Angola stand out.

The Chinese and the United States both face equally challenging choices. The United States must take on a new manner of thinking and help China become an equally powerful leader on the world stage. The Chinese, as much as they have gained by their effort to allow America to put itself into so much debt it threatens its existence, must also relent and be an equal partner, emerging as a stable and democratic culture and country.

Otherwise, not much hope of tomorrow. So, what can the G20, President Obama, the Japanese, and the UK do to make something new and positive happen?

China must be brought into situations that are multilateral, and helped to reduce the pressures internally -- the subjugation of free market forces caused by political arrangements, and the rampant corruption that instigates the clear but subtle fear that the center of the Communist Party can not enforce its will, and etc.

But the goal may be a good one. Soros, to close:

To sum up: the world is facing a choice between two fundamentally different forms of organization. We may label them international capitalism and state capitalism. The former, represented by the United States, has broken down and the latter, represented by China, is in the ascendant. The path of least resistance leads to the gradual disintegration of the international financial system as we know it. Yet a system of bilateral relations is liable to generate conflicts between states. A new multilateral system based on sounder principles needs to be invented. That would serve the best interests of both the United States and China and of course the rest of the world.

Spread it around. And email me, or leave a comment if you want the whole pdf. I can email it to you. dcrets [at] iirusa [dot] com

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