The legendary investor declared, "We are on the verge of an economic collapse which starts, let's say, in Greece, but it could easily spread. The financial system remains extremely vulnerable."
Is it time to panic? There are a lot of reasons to say no. And, it looks like stock markets are listening.
China has been an important player, buttressing confidence in Europe and even China itself over the past week.
Shanghai Composite Index: One Week
Clearly there has been a turnaround in China's main stock market. Suddenly it has vaulted out of the doldrums. After a three-month decline from the 3000 level, the Shanghai Composite Index bounced more than a hundred points in a week, topping 2750.
But Soros was certainly right about one thing. The financial system is very vulnerable. What's more, it is global.
So it wasn't just the confidence vote in Greece that soothed global economic worries and boosted western markets. After all, the confidence vote merely shores up the Greek government for now. The tough work remains to be done: deep and painful budget cuts.
If Greece falters and pulls down European economies, then western economies won't be immune to the shockwaves. And if the global financial crisis proved anything at all, it is that we are now interconnected economically around the world.
Chinese Premier Wen Jiabao demonstrated his understanding of this fact during his ongoing tour of several European nations. Premier Wen pledged that China would remain a long-term investor in Europe's sovereign debt market.
Considering the risk, it was a remarkable pledge. Just a few days ago, German chancellor Angela Merkel took the opposite tack. She warned Greece that unless it passed stiff austerity measures, Germany would not support a debt bailout.
Let's hope the good cop-bad cop routine works on hot-headed Greek legislators. Premier Wen understands very well that a Greek collapse could bring on the kind of financial disaster that George Soros predicts. No one, including China, would be immune.
China has already acquired more than €40-billion of euro-denominated assets this year. It certainly wasn't an act of charity.
China's Other Market Boosters
China also gave markets a shot in the arm with a personal commentary from the Premier in London's Financial Times. Wen wrote:
"China has made capping price rises the priority of macroeconomic regulation and introduced a host of targeted policies. These have worked. The overall price level is within a controllable range and is expected to drop steadily."
Amazingly clear language for a Chinese politician. He says the war on enemy number one has "worked". Inflation is "controllable". It should drop. No wonder Shanghai is happy.
Coming from a country with centralized government control over the economy, Wen's words carry real power. The fear of more interest rate increases, which has weighed the market down, is hugely diminished. The war on inflation may not be over, but Wen is telling the world that the worst is over.
As he put it: "There is concern as to whether China can rein in inflation and sustain its rapid development. My answer is an emphatic yes."
China Warns the U.S.
It wasn't all sweetness and light. Not with the U.S. debt limit talks running off the rails. After American politicians walked out of negotiations, China issued another grim warning.
The head of China's state pension fund declared that the U.S. should reduce the fiscal deficit percentage of its gross domestic product to maintain U.S. dollar's dominant status. In other words, the dollar cease to be the world's reserve currency if Washington can't get its act together.
At the latest count, China owns a towering $4.126 trillion in foreign assets. And now, as Washington dithers, China has clearly lost its taste for the greenback. China's foreign exchange reserves grew by $200 billion this year, according to Standard Chartered Bank. In the past, China invested the majority of its assets in U.S. instruments. But this year, three quarters of that new money has gone to non-U.S. dollar assets.
Again, there is no reason to panic – at least not yet.
China would be committing economic suicide by dumping its giant U.S. holdings and crashing the American economy. The Chinese say they want to see America support the dollar so they can continue investing here.
To be sure, the Chinese economy is not without monumental problems. But as events of the past week prove, China has the assets to make a big difference in Europe and the U.S.
Beijing will do everything in its power to prevent the kind of collapse which Soros predicts. But Chinese power is limited. It can't prevent politicians from leading the world into another crisis if they can't govern competently.
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