China: The World’s Internal Combustion Machine

George Soros, at 78, has been one of the world’s premier money managers for years. He is no longer at the head of the hedge fund performance table.  Money managers and mathematicians seem to do their best work when they are young. Soros keeps himself in the spotlight along with Warren Buffett, and Alan Greenspan—a troupe of old men who travel the world, dispensing advice about the economy and global finance.

Soros’s most recent attempt to illuminate what makes the markets work is his comment that China will be a “positive force” for rebuilding the global economy. The fact that Soros told Bloomberg News this does not protect it from being obvious. That is, unless, Soros is wrong. The core of his views, as told to Bloomberg, is that “They can stimulate their economy. They have reserves. They have a trade surplus. They will be one of the motors of the world economy.”
What China does not have in abundance due to the recession, and cannot replace, is exports. Soros seems to believe that China is a perpetual motion machine which will never be slowed by outside forces. That is, of course, not true. China’s economy will almost certainly undergo a recession at some point soon if  consumers continue to hibernate as their only option for financial survival.

Soros is somewhat right, but it almost does not matter. China has accumulated surpluses that are not matched by any other nation. It may end up being unfortunate that a great deal of that money is invested in US securities which probably cannot readily be sold suddenly or in large amounts, but the American government will certainly make the debt service payments. Surpluses run out. The US had one in 2000.

The miracle of the Chinese economy is likely to continue because the central government has the capital to keep the economy on relatively solid ground, probably for several years. That puts China is a race with the rest of the world, which actually may be healthier for the rest of the world than it seems.

China will, acting in its own interest, probably continue to aggressively fund the US deficit, but to effectively help the West recovery economically it will need to do more. That makes the world’s most populous nation more likely to be open to imports from other countries which will dent China’s balance of trade, at least temporarily. It is a small price to pay to keep the commerce engines lit in the US and EU. China is also very likely to be much more aggressive in protecting the intellectual property rights of software, entertainment, and complex machinery and aerospace products firms in the West. Each dollar that is stolen from these companies by Chinese pirates is a dollar of GDP improvement lost in nations like the United States.

China may begin to act less Chinese than it ever has. It needs to have its global competitors do well so that it does well. China can help the developed nations grow at 3% a year if it grows at 9%. Eventually, China wins the race to the top of the GDP mountain.  If China chooses to push too hard to get there quickly by wounding other large economies, it will ruin its own future.

Now that economic isolationism is no longer even an option for any large nation, China will have to become the arsenal of the world’s economic recovery.

Douglas A. McIntyre