Soros: China must fix the global currency crisis

I'm not sure China is the only offender with the Fed printing press going warp 9, but it's an interesting article...

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http://www.ft.com/cms/s/0/f4dd9122-d22a-11df-8fbe-00144feabdc0.html

China must fix the global currency crisis

By George Soros

Published: October 7 2010 19:40 | Last updated: October 7 2010 19:40

I share the growing concern about the misalignment of currencies. Brazil’s finance minister speaks of a latent currency war, and he is not far off the mark. It is in the currency markets where different economic policies and different economic and political systems interact and clash.

The prevailing exchange rate system is lopsided. China has essentially pegged its currency to the dollar while most other currencies fluctuate more or less freely. China has a two-tier system in which the capital account is strictly controlled; most other currencies don’t distinguish between current and capital accounts. This makes the Chinese currency chronically undervalued and assures China of a persistent large trade surplus.

Most importantly, this arrangement allows the Chinese government to skim off a significant slice from the value of Chinese exports without interfering with the incentives that make people work so hard and make their labor so productive. It has the same effect as taxation but it works much better.

This has been the secret of China’s success. It gives China the upper hand in its dealings with other countries because the government has discretion over the use of the surplus. And it protected China from the financial crisis, which shook the developed world to its core. For China the crisis was an extraneous event that was experienced mainly as a temporary decline in exports.

It is no exaggeration to say that since the financial crisis, China has been in the driver’s seat. Its currency moves have had a decisive influence on exchange rates. Earlier this year when the euro got into trouble, China adopted a wait-and-see policy. Its absence as a buyer contributed to the euro’s decline. When the euro hit 120 against the dollar China stepped in to preserve the euro as an international currency. Chinese buying reversed the euro’s decline.

More recently, when Congressional legislation against Chinese currency manipulation emerged as a real threat, China allowed its currency to appreciate against the dollar by a couple of percentage points. Yet the rise in the euro, yen and other currencies compensated for the fall in the dollar, preserving China’s advantage.

China’s dominant position is now endangered by both external and internal factors. The impending global slowdown has intensified protectionist pressures. Countries such as Japan, Korea and Brazil are intervening unilaterally in currency markets.

If they started imitating China by imposing restrictions on capital transfers, China would lose some of its current advantages. Moreover, global currency markets would be disrupted and the global economy would deteriorate.

Inernally, consumption as a percentage of GDP has fallen from an already low 46 per cent in 2000 to 35.6 per cent in 2009, as China expert Michael Pettis has shown. Additional investments in capital goods offer very low returns. From now on, consumption must grow much faster than GDP.

Thus both internal and external considerations cry out for allowing the renminbi to appreciate. But currency adjustments must be part of an internationally coordinated plan to reduce global imbalances.

The imbalances in the US are the mirror image of China. China is threatened by inflation, the US by deflation. At nearly 70 per cent of GDP, consumption in the US is too high. The US needs fiscal stimulus enhancing competitiveness rather than quantitative easing that puts upward pressure on all currencies other than the renminbi.

The US also needs the renminbi to rise in order to reduce the trade deficit and alleviate the burden of accumulated debt. China, in turn, could accept a higher renminbi and a lower overall growth rate as long as the share of consumption is rising and the improvement in living standards continues.

The public in China would be satisfied, only exporters would suffer and the currency surplus accruing to the Chinese government would diminish. A large rise would be disastrous, as Premier Wen says, but 10 percent a year should be tolerable.

Since the Chinese government is the direct beneficiary of the currency surplus, it would need to have remarkable foresight to accept this diminution in its power and recognize the advantages of coordinating its economic policies with the rest of the world. It needs to recognize that China cannot continue rising without paying more attention to the interests of its trading partners.

Only China is in a position to initiate a process of international cooperation because it can offer the enticement of renminbi appreciation. China has already developed an elaborate mechanism for consensus building at home. Now it must go a step further and engage in consensus building internationally. This would be rewarded by the rest of the world accepting the rise of China.

Whether it realises it or not, China has emerged as a leader of the world. If it fails to live up to the responsibilities of leadership, the global currency system is liable to break down and take the global economy with it. Either way, the Chinese trade surplus is bound to shrink but it would be much better for China if that happened as a result of rising living standards rather than a global economic decline.

The chances of a positive outcome are not good, yet we must strive for it because in the absence of international cooperation the world is heading for a period of great turbulence and disruptions.

The writer is chairman of Soros Fund Management LLC

 

Thanks for the article. Must be read very carefully. It hides more than meets the eye. I will point to this:

"When the euro hit 120 against the dollar China stepped in to preserve the euro as an international currency. Chinese buying reversed the euro's decline."

This statement essentially says that China is a currency manipulator and has already started the currency war. Their move is troubling though. By buying the Euro they essentially started the fall of the dollar. It appears that the Chinese should want a strong dollar to help their exports. So, why they should buy the euro to prevent a further euro slide and weaken the dollar?

- One explanation is that this move was part of a bigger allocation scheme to preserve an optimum trade balance between China and EU and USA. I doubt it though. I highly doubt this is the case. It is too complicated.

- IMO there are hidden motives in the move of China to support the euro that include but are not limited to weakening the US and down the road claim reserve status for their own currency. This is more than curreny war. This may cause a real war down the road. It appears that the Chinese are using their huge currency reserved to play power games rather than to cooperate with other countries in ways that they express their graditute for financing their growth. This is becoming a very dangerous game.

Any thoughts? Maybe some other explanation of the wired move by Chinese to support the euro when they should be actually supporting the dollar?

 

Soros can yap all day if he wants. But it sure looks like Soros vs. China part 2. Based on past results, I think China would take a chunk out of his wealth again.

Time to place your bets!

 

Actually, EU is the largest trade partner of China. By strengthening the euro vs. everything else (particularly with respect to the dollar), they are increasing demand for their (Chinese) exported products. Makes perfect sense.

A weak euro kills their export market just as much if not more than a weak dollar.

In fact, driving up the euro not only increases eurozone's demand for Chinese goods, but eurozone demand for US exports. Three large parties (besides the rest of the world) lose out to this approach -- Chinese consumers (who buy Eurozone goods) and US consumers (who buy Eurozone goods). But US producers benefit, just as Chinese ones do. And of course German producers don't like it... It's a fascinating new balance...

http://www.pbc.gov.cn/publish/html/2010s04.htm

http://www.pbc.gov.cn/publish/html/2010s09.htm

 

First of all, there is no such thing as an "International Economy" or a "Global Economy". China realized this and saw how America and Europe were weakening themselves by their pursuit of globalization. So, China simply took advantage of all of the free trade laws and pro-globalization policies instituted by the west to grow their economy.

Now, the west sees how China took advantage of the West's stupidity and wants China to make concessions. Unlike the West, China cares about their own people more than the "International community". So, China is reluctant to implement policies that hurt their own people. And since, as part of the Globalization push, China was given permanent status as part of the WTO about 10 years ago, they can basically do whatever they want. Before becoming a permanent WTO member, China had to behave because their status was voted on every year.

 

In simple words, USA created the monster "China" and now this monster is coming to eat USA.

 

No, it does not. Usually Central Banks intervene to strengthen or weaken their currency, like BOJ did recently. They are not involved in other currency pairs, like buying EUR and selling USD.

http://www.census.gov/foreign-trade/balance/c5700.html#2010

Trade surplus with the US was 226.8 Billion in 2009

http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/china/index_en.htm

Trade surplus of China with the EU was : Euro 214.7 - 81.7 = Euro 133 Billion = about $172 Billion with an average 1.30 exchange rate

So, you do not know what you are talking about. It is better not to talk when you just imagine things up.

 

If China sets their currency too low, why complain about it. Why don't the Americans and Europeans just shut up and take advantage of it? They need to stop spending their money on cheap imported goods and spend it on instead on Chinese investments that are priced way below their true value.

The Chinese can't hold their currency down forever. When the currency finally rises to it's true value, those investments will be worth a lot more.

 

1 US dollar = 7 Chinese Yuan. There is not much difference.

 

I wrote a post on this on my blog. Here's one of my conclusions aimed at China:

We live in a fiat debt-backed paper world. If you want to export your economic output, without trying to allow world trade to be somewhat fair - you too will lose in the end. You are exporting your economic output for pieces of debt backed paper that will collapse in the end. And you, a great exporting power - are accelerating that collapse, and with it, your own economic demise.

I'm targeting this to China - but I'll also say this: Germany, are you listening?

fiatcollapse.blogspot.com