Soros vs Dalio in an Olympian debate on China
George Soros and Southeast Asia are at odds again. This time, though, it’s not about overvalued currencies. It’s about China.
The billionaire that developing nation governments love to hate is making headlines by aiming his megaphone at Xi Jinping’s competence. Soros argues Asia’s biggest economy faces a 1997-like crisis as a property boom goes bust spectacularly and Covid-19 fallout upends an “unsustainable” Chinese growth model.
The crux of Soros’s argument is that falling prices will “turn many of those who invested the bulk of their savings in real estate against Xi,” whose plan to secure an unprecedented third term as leader later this year “doesn’t look promising.”
Xi, Soros concludes, “has many tools available to re-establish confidence – the question is whether he will use them properly.”
The odds are yes, officials in Bangkok suggest. Thailand’s Government Pension Fund is mulling big increases in its Chinese equities to harness the growth of new technologies and a government-decreed pivot toward sustainability.
There’s no reason to double down on China Inc if you think Soros is correct.
Thailand’s logic is representative of a broader Southeast Asia attitude as 2022 stumbles out of the starting gate. On January 1, the 15-nation China-centric Regional Comprehensive Economic Partnership, or RCEP, came into existence.
It puts China at the very center of history’s biggest trade deal and global supply chains at arguably the ideal moment – with the US looking on from the sidelines.
It’s a reminder of how the chaotic Donald Trump years made China’s relationship with developing Asia great again. Sure, the former US president’s trade war wreaked havoc for Beijing. But the broader collateral damage hurt trust in Washington more.
Look no further than who’s coming to the Beijing Olympics. While current President Joe Biden organized a diplomatic boycott, Singapore President Halimah Yacob will be at Friday night’s opening ceremony. So will South Korea’s Speaker of the National Assembly Park Byeong-seug.
Where Biden mirrors Trump
Beset by domestic challenges – from the pandemic to consolidating power after Trump’s January 6, 2021, coup attempt to dealing with Russia’s troop build-up on the Ukraine border – Biden’s Asia policy is a work in progress.
Yet his failure to remove Trump’s taxes on Chinese goods – taxes that did zero to alter US-China trade dynamics – continues to dent the American brand. Ditto for Biden’s failure to re-enter the Trans-Pacific Partnership process that Trump exited.
This Trumpian void created space for Xi to broaden China’s regional coattails.
“China is betting on using trade to win over its neighbors, particularly the members of the Association of Southeast Asian Nations, or ASEAN, the most successful Asian bloc,” says Kishore Mahbubani, a distinguished fellow at the National University of Singapore’s Asia Research Institute.
Mahbubani adds that “economic interdependence created by trade deals is harder to unravel.” Just ask Trump, who couldn’t break up the North American Free Trade Agreement and had to settle for a cosmetically renegotiated pact.
Trump ended up helping China spread its wings in the Asia region. The RCEP, remember, is really code for access to China’s giant economy and its growing middle-class.
“Trade is an important driver of growth for Asia, and RCEP’s entry into force will put Asia back on its pre-Covid growth trajectory,” says HSBC’s trade economist Ajay Sharma.
“Intra-Asian trade – already larger than Asia’s trade with North America and Europe put together – will receive a further boost with RCEP’s standardized rules of origin,” Sharma says.
“The RCEP will make it easier for firms to use Southeast Asia as a production base and could accelerate the diversification of supply chains and the re-allocation of FDI already underway in Asia.”
Immediately, Sharma says, RCEP members are eliminating tariffs on about 65% of goods traded within the grouping, and that’s expected to increase to roughly 90% over 20 years.
Thanks to the RCEP’s common “rules of origin” framework, exporters will generally need to source at least 40% of inputs from within the bloc in order for their final goods to qualify for tariff preferences when exported to other trade-pact members.
This will, in theory, streamline existing Asia Pacific-region free-trade frameworks and tighten intra-regional trade linkages. It also will increase incentives for foreign businesses to, as Sharma puts it, “benefit from building out production facilities in lower-cost ASEAN markets to make use of RCEP trade rules and preferences when trading within the region.”
Chinese tourists grounded
Economies like Thailand, Indonesia, Malaysia, the Philippines and Vietnam also rely on Chinese tourists. These Covid-shaken times have disrupted this important economic engine. But if Omicron really does herald a less deadly Covid-19 pivot, it could rev up once again relatively quickly.
Thai officials, though, are also teeing off mainland equity markets that many see as undervalued. Recently, wealth management giant Pictet Asset Management upgraded Chinese shares to overweight after a previously neutral advisory.
“Chinese equities could recoup last year’s declines and narrow the valuation gap with their counterparts in the coming months,” says Luca Paolini, Pictet’s chief strategist.
Paolini points to Beijing authorities, led by the People’s Bank of China, adding stimulus to the economy as the US Federal Reserve prepares to tighten.
The firm also thinks mainland shares might be a hedge against a possible Russia-Ukraine military conflict that complicates Biden’s domestic agenda. But any bet on the broader Asian region is a bet on China growing north of 5% this year.
But Soros isn’t buying it, and it’s worth exploring why. In recent months, the 91-year-old investor has locked swords with China bulls like Bridgewater Associates founder Ray Dalio. In Soros’s view, Dalio is making a “tragic mistake” by upping investments in China.
In general, Soros has been wary of Beijing’s growing surveillance policies and crackdowns on private businesses from tech to education to entertainment. This Soros versus Dalio matchup seems worthy of its own Beijing Olympics. And the stakes couldn’t be higher.
In more recent comments at Stanford University’s Hoover Institution, Soros put greater emphasis on China’s property troubles. He posits that a series of defaults by developers and declining prices of land and apartments will unmoor the No 2 economy in ways that shock global markets.
China’s ‘unsustainable’ property market
Soros calls “unsustainable” the practice of buyers borrowing money to start paying for flats before they are even built. What’s more, he warns, the model of local governments getting the bulk of their revenue selling land at high prices risks a domino effect not unlike Southeast Asia’s implosion in 1997-98.
Back then, many in the region blamed Soros and his fellow currency speculators for pulling the rug out from under the region. Nowhere more than Malaysia, whose then-prime minister Mahathir Mohamad accused Soros directly of crashing his economy.
This time, Soros is more an intellectual spectator than speculator actively betting against the yuan or Shanghai shares. Clearly, shorting China didn’t go well for Kyle Bass at Hayman Capital Management. And 12 years on, fears expressed by Jim Chanos at Kynikos Associates that China is “on a treadmill from hell” haven’t aged well.
Yet investors ignore the Soros argument at their own peril. Sure, his take that Xi won’t get the votes later this year to stay on as leader is rather fanciful. As Soros puts it: “Given the strong opposition within the Communist Party, Xi Jinping’s carefully choreographed elevation to the level of Mao Zedong and Deng Xiaoping may never occur.”
Concerns that Xi’s “zero Covid,” tech crackdowns and China’s over-reliance on rising property prices are valid. Xi’s desire for ever greater control – including over Hong Kong – and intensifying censorship seem out of step with the narrative of a confident nation ready to lead the global economy.
This leadership position is evidenced by China’s gross domestic product (GDP) surpassing the European Union for the first time ever in 2021. Next target: Biden’s America.
The good news from Chinese equities, though, is that Xi has it in his power to prove Soros wrong and vindicate Dalio’s bullishness in mainland shares.
Not-so dynamic Covid policy
Xi’s government can cheer markets by shifting to a less absolute stance on Covid. As even Hong Kong Chief Executive Carrie Lam admits, “we know there is no way to guarantee zero cases” in the Omicron stage of the pandemic.
The recent rhetorical shift toward a “dynamic zero Covid” policy could herald an end to mass lockdowns of the kind recently imposed on Xian’s 13 million people. If so, China’s GDP could surprise again in 2022, while greater certainty for factory continuity could ease supply-chain woes boosting global inflation.
Xi could go easier on tech giants like Alibaba, Baidu, Didi, JD.com, Tencent and others. That alone could pump new life into Chinese shares at a moment when barriers to overseas investment are falling away.
Finally, Xi’s reform team can accelerate moves to get its China Evergrande Group crisis out of the headlines. Recent reports suggest Beijing authorities are plotting to break up Evergrande where officials would sell off most of its assets and use the proceeds to repay creditors.
“Property stress hurts confidence and increases risk aversion,” says Michael Hirson at Eurasia Group. “Concerns about property sector strain and downside risks to GDP growth continue to undermine investor confidence … despite recent policy measures to shore up confidence.”
Any sense China is fixing its problems, not just treating the symptoms, might give officials from Bangkok to Tokyo and investors from New York to Frankfurt greater confidence in its share markets. And give Dalio the big win over Soros in 2022.
Author: William Pesek, Asia Times