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Battle erupts between Xi Jinping and George Soros

KATSUJI NAKAZAWA, Nikkei senior staff writer | China

TOKYO -- A fierce battle has broken out between Chinese President Xi Jinping and billionaire investor George Soros over the future of the Chinese economy, the world's second-largest after the U.S.

     Soros suddenly changed his stance toward China, painting a gloomy picture of the country's economy and effectively throwing down the gauntlet against Xi.

     The 62-year-old Chinese leader responded immediately by effectively picking up Soros' gauntlet and launching a barrage of attacks on the 85-year-old prominent investor through state-controlled media.

     The Xi-Soros battle began to unfold on Jan. 21, when the former was visiting Egypt, south of the Mediterranean, as part of his Middle East tour, while the latter was staying in the Swiss resort of Davos.

     The two may have been closer to each other geographically than they usually are, but they found themselves poles apart economically.

Soros' opening salvo

Soros launched the opening salvo against Xi. Soros said in a television interview during the annual meeting of the World Economic Forum in Davos that the Chinese economy is headed for a hard landing.

     "A hard landing is practically unavoidable," he said. "I'm not expecting it, I'm observing it."

     Soros' remarks sent shock waves through global financial markets, as market players took his remarks as a clear sign that he has already taken positions in accordance with the hard-landing scenario.

     With the Chinese economy slowing, Xi's administration is seeking to achieve a soft landing on a path of stable growth.

     During his three-nation Middle East tour, which also took him to Saudi Arabia and Iran, Xi pledged to offer a total of $55 billion in investments and loans to the region.

     His pledge of massive financial assistance is part of China's efforts to create a "new Silk Road economic zone" linking itself to the Middle East, Europe and Africa by land and sea.

     Ahead of Xi's Middle East trip, China also released its first Arab policy paper, which proposes establishing a "1+2+3" cooperation pattern, with energy cooperation as its core and infrastructure construction as well as trade and investment facilitation as its two wings.

     The proposed cooperation pattern will also have three new major technology fields -- nuclear energy, space satellites and new energy -- as its three breakthroughs, according to the paper.

     The Arab policy paper was compiled by the so-called Central Leading Group on Foreign Affairs of the Chinese Communist Party based on inputs from various sectors, including the economy and finance, science and technology, and military, as well as foreign and security.

Stealing the spotlight

The real aim of Xi's visit to the Middle East was to demonstrate China's presence in the region as a soft "balancer," replacing the U.S., which has seen its regional influence eroded.     

     That is why Xi visited Iran, becoming the first leader of a permanent United Nations Security Council member country to do so since international sanctions against the Persian Gulf nation were lifted earlier in January.

     The sanctions were lifted under a historic nuclear deal between Iran and six world powers -- the U.S., the U.K., France, Russia, China and Germany -- reached in the summer of 2015. The U.S., the U.K., France, Russia and China are five permanent members of the U.N. Security Council.

     Before visiting Iran, Xi also visited Saudi Arabia, a Sunni Muslim power that severed diplomatic relations with Iran, its Shiite Muslim archrival, in early January.

     Xi was supposed to grab the global spotlight throughout his Middle East tour amid rising regional tensions. But Soros suddenly stole the spotlight from Xi by making highly-publicized remarks in Davos.

     Market players paid close attention to turmoil in global financial markets centering around the weakening of the the yuan and a slump in Chinese shares, rather than to Xi's Middle East trip.

     Share prices on the Shanghai stock market tumbled 22% in January alone. If China's economic turmoil drags on due to a sharp decline in the value of the yuan, not only Xi's diplomatic initiative in the Middle East but also even the proposed "new Silk Road economic zone" could fizzle out.

Soros' sudden change

As a pioneer of the hedge-fund industry, which influences global markets, Soros has so far been hugely popular among Chinese business people and investors, with his books piled up at local bookstores, including a state-run bookshop in Wangfujing, central Beijing.     

George Soros speaks at the Boao Forum for Asia conference on China's Hainan Island in 2013.

     Soros was invited to the annual Boao Forum for Asia conference on Hainan Island, on the southern tip of mainland China, in the spring of 2013. The hall where he spoke was packed.

     Speaking at the 2013 conference, Soros said, "The rapid growth of shadow banking [in China] has some disturbing similarities with the subprime-mortgage market in the U.S. that caused the financial crisis of 2007-2008." But he was not speaking in a belligerent tone.

     Almost three years on, Soros has suddenly changed, clearly saying no to the Xi administration's economic and financial policies in Davos.

China's wave of attacks

China has responded by accusing Soros of "declaring war" on the yuan and has launched a wave of blistering attacks on the elderly investor through state-controlled media outlets.

     On the early morning of Jan. 23, Xinhua News Agency carried an English-language article issuing a strong warning to what it said are international hedge funds shorting the yuan and mounting attacks on capital markets in mainland China and Hong Kong.

     Xinhua also carried a Chinese-language article the following day that warned, "Vicious shorting [of the yuan] will face higher trading costs and possibly severe legal consequences."

     After Xi returned to Beijing on Jan. 24 from his Middle East tour, China stepped up its rhetoric against Soros.

     "Soros' war on the yuan and the Hong Kong dollar cannot possibly succeed -- about this there can be no doubt," the overseas edition of the People's Daily, the mouthpiece of the Chinese Communist Party, said in a front-page article on Jan. 26.

     The domestic edition of the People's Daily ran scathing anti-Soros articles on the front and second pages on Jan. 28, claiming that the Chinese economy remains firm and will never experience a hard landing.

     The domestic edition of the People's Daily also ran a biting anti-Soros editorial on the fourth page on Jan. 29. The Chinese Communist Party's official newspaper in Shanghai also joined the wave of Soros-bashing on Jan. 30, citing the People's Daily.

     "This anti-Soros media campaign would have been impossible without the instruction and approval of the Chinese leadership," one Chinese media source said. "President Xi suffered a loss of face in the Middle East because of Soros' remarks. The Chinese leadership cannot tolerate them."

     In short, Xi's anger triggered the wave of fierce attacks on Soros by China's state-run media outlets. Soros has now become a foe of the Chinese Communist Party.

Playing hardball

Xi came to power as the Communist Party's general secretary in the autumn of 2012. He assumed the post of Chinese president in the spring of 2013. He has used his sweeping anti-corruption campaign as a tool to fight his power struggle with political foes and consolidate his power.

     The Chinese leader has distinguished between friends and foes and shown zero tolerance toward the latter in the anti-corruption campaign and the Communist Party's "mass line educational practice activities," which were launched as part of the anti-corruption drive.

     These campaign and activities are reminiscent of the 1966-1976 Cultural Revolution, which Mao Zedong, a revolutionary leader who led China to communism, launched as part of his power struggle with political foes.

     Xi's regime has also played hardball with the U.K. successfully.

     British Prime Minister David Cameron met with the Dalai Lama when the 80-year-old Tibetan spiritual leader visited the U.K. in 2012. China regards the Dalai Lama as a dangerous separatist.

     China put pressure on the U.K., reducing bilateral contacts as much as possible and tightening the stranglehold on the British economy. Cameron changed his stance, bowing to Chinese pressure, and now puts emphasis on economic relations with China.

     In March 2015, the U.K. became the first major European country to declare its participation in the China-led Asian Infrastructure Investment Bank, a new multilateral institution.

     Relations between the U.K. and China have continued to warm, as exemplified by an agreement in October 2015 on the U.K's introduction of Chinese nuclear reactors. The agreement came during Xi's visit to the U.K.

     But this Chinese pressure tactics will not work in the case of Soros, the pioneer of the hedge-fund industry, which is not bound by national borders. In fact, Soros has a track record in this regard, having won his battle against the Bank of England, the British central bank.

     When China's stock market plunged into chaos last summer, the Chinese leadership mobilized even senior public security and police officials close to Xi to intervene in the market, launching a strict crackdown on short-selling of shares.

     In the case of Soros, Xinhua News Agency also warned of "severe legal consequences" of what it called "vicious" short selling. But it will be impossible for China to capture Soros abroad.

Puppet of imperialism?

The Chinese leadership suspects that Soros, the U.S. government and corporate America have started zeroing in on the Chinese economy in an integrated manner.     

A Chinese mail-order website advertises one of George Soros' books, which are hugely popular in China.

     China wants to establish the "new Silk Road economic zone" to serve as a counterbalance to the U.S.-led Trans-Pacific Partnership free trade agreement among 12 Pacific Rim countries.

     The U.S. and Japan are the two biggest economic powers in the proposed TPP free trade zone. The U.S., Japan and 10 other countries reached a broad agreement on the historic trade deal in October 2015.

     China fears that the U.S. will try to make the proposed "new Silk Road economic zone" fall through.

     The outbreak of the "Arab Spring" in early 2011 prompted the Chinese communist regime to strictly crack down on even small gatherings at home, as it fears that "heping yanbian" (peaceful evolution) could spill over into the country.

     "Peaceful evolution" means a plot by the U.S. and other countries to topple the Chinese communist regime through peaceful means. Chinese officials have now started seeing Soros as a puppet of "imperialism."

     The International Monetary Fund decided in late November 2015 to add the yuan to its basket of reserve currencies. The Chinese currency will make up part of the IMF's so-called Special Drawing Rights.

     The IMF's decision marks a significant step forward in China's efforts to make the yuan a major global currency. But as the world's second-largest economy, China has a responsibility to communicate with global markets through the proper transmission of information.

     Whether China actually does so will also determine the outcome of the battle between Xi and Soros. The internationalization of the Chinese economy is now being put to the test. 

Katsuji Nakazawa is a winner of the prestigious Vaughn-Ueda prize for international journalism. He joined The Nikkei in 1987 and is a former chief of The Nikkei's China Headquarters. This column is part of weekly series investigating what is happening at the center of President Xi Jinping's administration.


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