Ed’s Daily Notes for January 2nd   Leave a comment

Money News: Soros: China’s Future Path Is ‘Major Uncertainty Facing the World’

I may not agree with George Soros’s political views, but I always pay attention to his investment views, as he is one of the best macro analysts around:

How China decides to approach the tension it faces between sustaining rapid economic growth and amassing a major debt burden represents the key global issue facing the world today, says hedge fund legend George Soros, chairman of Soros Fund Management.

“The major uncertainty facing the world today is . . . the future direction of China,” he writes in Economia.

“The growth model responsible for its rapid rise has run out of steam. That model depended on financial repression of the household sector, in order to drive the growth of exports and investments.”

That means consumers account for only 35 percent of GDP, Soros notes. “Its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing.”

The debt explosion makes China look a bit like the United States prior to the 2008-09 financial crisis, Soros argues.

“But there is a significant difference, too,” he writes. “In the U.S., financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises.”

The People’s Bank of China took action in 2012 to stanch the debt growth, but the government stepped in this year when the economy started to slow down, forcing the central bank to ease and restarting the steel furnaces, Soros explains. The economy quickly turned around.

“The Chinese leadership was right to give precedence to economic growth over structural reforms, because structural reforms, when combined with fiscal austerity, push economies into a deflationary tailspin,” he writes.

“But there is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.”

How China addresses that contradiction is of great importance for the world, Soros contends.

“A successful transition in China will most likely entail political as well as economic reforms, while failure would undermine still-widespread trust in the country’s political leadership, resulting in repression at home and military confrontation abroad.”

The full article by Soros is here. He also talks about Europe, the U.S., and Japan. Whether you agree or disagree, it is still a must-read.

The Telegraph: François Hollande concedes taxes ‘too heavy’ in admission that annoys all sides in France

A New Year’s message from François Hollande backfired as his vague promise that taxes would be lowered some time in the future jarred with French voters facing tax increases that took effect as he was speaking.

Instead of winning plaudits for his unexpected admission that taxes had become “too heavy, much too heavy”, the unpopular socialist president – weakened by tax increases, rising unemployment and a shrinking economy – provoked incredulity and scepticism among critics on both Left and Right.

Hard-pressed French households faced VAT increases on most goods and services from Jan 1 and only days earlier France’s supreme court had upheld a new 75 per cent supertax on high-paying companies.

Hollande is a reminder to Americans that there are worse leaders than Obama. Admittedly, that is a “roadkill versus rotting fruit on the ground” comparison…

CNNMoney: Fiat to buy full control of Chrysler

It’s official: Chrysler will become an Italian car company. Thanks American taxpayers!

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Posted January 2, 2014 by edmcgon in Economy, Market Analysis, News, Politics

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