Billionaire investor George Soros yesterday sought to intensify
pressure on policymakers to rebalance a global monetary system
that he said was rapidly approaching breaking point.
In an exclusive interview with Emerging Markets,
Soros said that Chinas reliance on a fixed exchange rate
had led to a major imbalance in the world
He called on Beijing to allow its currency, the renminbi, to
appreciate by 10% a year against the dollar, which he said
would both relieve pressure in the Chinese economy and
stimulate activity and inflation in the US.
Soros warned that failure to act decisively on the currency
would mean the current [monetary] system is liable to
break down and other countries will be driven to capital
But he added that China should be allowed to carry out
appreciation in an orderly manner and dismissed
demands made by several US politicians that it should let the
renminbi rise 20%, saying that would wreak
In a wide-ranging interview Soros said that the world was
suffering from widespread unemployment and stagnation,
particularly in the developed world.
The problem is acute, because the imbalances that were
at the root of the financial crisis have not been removed. They
are now pushing the global economy into substandard
growth, he said.
He blamed Chinas decision to control its exchange rate
through capital controls and said that Beijing needed to embark
on more rapid appreciation. Since it relaxed controls in June,
the currency has risen around 2% against the dollar.
Soros said that rising wages were threatening to fuel
inflation in China while the developed world was in danger of
suffering a deflationary slump. An exchange rate
adjustment of 10% would just be the right amount to reduce the
danger, he said.
But Soros backed the claim by Chinese Premier Wen Jiabao
that a 20% appreciation would cause havoc. Because
theres widespread unemployment, the labour force is not
reabsorbed elsewhere, so instead of more consumption, you
actually have more unemployment and less production.
However he insisted that the Chinese government has to make
a move because the alternative was a trade war and a
repeat of the 1930s.
Soros, who famously made a £1 billion by betting that
sterling would be forced out of the European exchange rate
mechanism in 1992, denied that speculation played a major role
in fuelling currency distortions.
He pointed out that the dominant factor in the currency
market was China. In so far as theres speculation,
the speculation revolves around what China is going to
do, he said.
Soros acknowledged that ultra loose monetary policy in the
US was complicating the picture, but he rejected the view that
the recent depreciation of the dollar had caused competitive
depreciation of other currencies and undermined the
dollars value as a reserve currency.
He criticised the current reliance by US policymakers on
quantitative easing (QE) central banks increasing the
money supply saying this risked fuelling asset
I believe strongly that monetary policy cannot
substitute [for] fiscal policy, he said. This
[view] goes against the prevailing dogma.
Im strongly arguing that the US needs fiscal
stimulus, rather than QE, and I dont think QE will have
the effect that is expected of it.