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 economy.
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 controls.
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 havoc.
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 bubbles.
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.