Billionaire George Soros may be politically controversial in America but his financial track record is still very impressive. He made a fortune by betting against an overvalued British pound and he was among the first to predict the U.S. financial crisis, caused by what he called a credit "super bubble."
Now Soros is making headlines within China. His predictions are right in line with our own forecasts at the China Stock Digest, and very encouraging for our model portfolio. Speaking at Shanghai's Fudan University, Soros predicted that China's economy will grow faster than people expect and so will its global economic influence.
China will be the first country to recover from the global financial crisis, Soros says and indeed it is on track for continued expansion. As we have reported, China's GDP grew by 6.1% during the first quarter while the U.S. shrank by the same amount. China's continuing growth and its powerful position as America's banker will transform the world's financial order.
Despite signs of recovery in U.S. stock markets, Soros told the Chinese that the world is still in a bear market, and China is the exception. He went even further, predicting that China could "replace the United States as the engine of global economic growth."
During the height of the financial crisis, the China Stock Digest made substantial profits with short term bets on several Chinese banks. As Soros noted, Chinese banking has benefited from being isolated from the rest of the world and is in better shape than the international banking system. China's extensive capital controls helped to shield its financial institutions from the worst of the global financial crisis.
China's banks have also become an important force in helping the Chinese economy recover from a sharp decline in exports to western nations. In addition to a massive government stimulus program, China's biggest banks have flooded the economy with new loans to boost internal consumption and development. As Soros put it, "when the government says 'lend', banks lend. This puts China in a better position to recover from the recession and that is in fact what has happened."
Few economists agree with Soros about China's potential ability to become the new engine of worldwide growth. But there's little doubt that China is moving faster than the United States to boost its own economy.
The success of China's stimulus plan is already showing up in a number of key indicators, as we noted in the current issue of the China Stock Digest. Although China may not save any western economies, it is clearly a beacon of hope to its trading partners in Asia.
We remain very cautious about the stock market rebound in the United States. The problems in the U.S. economy remain critical and we may be seeing a bear market rally on American exchanges. In Shanghai, Chinese "A" shares are still trending strongly upward with a gain for the year of 52 percent, substantially better than U.S. stock performance. Although some observers are warning that certain companies on the Shanghai Exchange are overvalued, the soaring value of "A" shares is one more indicator of China's economic expansion at a time when the rest of the world is still reaching for a lifeline.
As George Soros put it, "China should play a constructive role in the reconstruction of the global economic system...China is a positive force when the world economic and political orders are in disarray."
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