Surface Tension: George Soros on China
Soros stakes bets on a cooler economy and global cooperation
By Wang Duan, Caixin Online
Last Update: 11:43 PM ET Feb 25, 2010
HONG KONG (Caixin Online) -- George Soros takes his coffee with a little milk before focusing on the foam currently frothing at the top of China's markets.
The 79-year-old financier and political activist sat down for an exclusive interview with Caixin at the Shangri-la Hotel on Feb. 4 in Hong Kong, where he also delivered a speech at Hong Kong University.
A hard landing for Chinese markets could come, Soros said, due to a significant increase in supply offset by falling demand. China's regulatory authorities have managed the situation well thus far, he said, but he's concerned about how various countries are maneuvering in the face of global imbalances.
Looking back at the past year's responses to the global financial crisis, Soros says lending by Chinese government-owned banks was indeed excessive, but that regulatory decisions to adjust reserve ratio requirements were appropriate.
"You know now," he observed, "people see bubbles everywhere."
But how should Chinese authorities react to all that bubbly foam in the future? Should they swipe away the suds? Why did the international financial system flounder in the first place, and what's the next step? Here's what Soros had to say:
Caixin: Do you think there are asset bubbles in China?
Soros: People see bubbles everywhere. Again, there is no question the financial stimulus has pushed up asset prices. Whether that is a bubble or not actually depends on whether it's going to be a hard landing or a soft landing. If it is a soft landing, then it is not a bubble. If it is hard landing, it will be a bubble. We'll only know if it's a bubble or not later.
Caixin: Do you think Chinese government actions will create a hard or soft landing?
Soros: It's a big question, because the first effect of restricting credit is the increase in the demand for credit, because everybody wants to rush, to get whatever credit is available. So it may take time before these measures actually slow down economic growth. And the longer it takes, the bigger the chance that it will turn into a hard landing. Because if the economy continues growing at this excessive rate until next year, you could have a significant increase in supply coincide with a decline in demand, and then you would have a hard landing. And that is why I think the government is vigilant in pushing hard to restrict credit.
Caixin: What is your attitude toward China now? Positive or negative?
Soros: I'm very cautious, until the economy cools off a little. When it does, I will be more optimistic again.
Caixin: In 2009, Chinese banks issued 10 trillion yuan in new loans. The government has said there will be another 7.5 trillion yuan in loans this year, although banks loaned more than 1 trillion yuan in January alone. Do you think this unprecedented credit growth will eventually lead to overheating, inflation and harsher policy tightening? Do you worry about the potential risk of non-performing loans in the medium- to long-term?
Soros: The overheating, the inflation, the harsh policy tightening is happening right now and it will continue to happen until the economy cools off. And with this explosion of credit, there are bound to be non-performing loans in due course. The extent depends on whether it is a hard landing or soft landing.
Caixin: In your opinion, the Chinese government should allow the yuan to appreciate, which you argue would resolve the problem of global trade imbalances but also deal with the inflation problem in China. If the yuan were to appreciate unilaterally, how could the government cope with hot money inflows?
Soros: I think the government would be very wise to allow the renminbi (yuan) to appreciate. This would be very useful from both the domestic and international perspective. The question is how to do it without creating an inflow of hot money. That's a very big problem. One way to do it would be to have a one-time revaluation and then to introduce a crawling peg, like a 5% margin based on the moving average of the last three months' exchange rates, and then actually allowing the renminbi to fall, as well as to rise. That would discourage speculation.
Caixin: In your view, will the Chinese government move to internationalize the yuan?
Soros: The government is unlikely to do it because the authorities are very cautious and don't like sudden change. And the same applies to the removal of international capital controls.
Caixin: What is the most important area for financial regulatory reform?
Soros: I would like to see an international agreement on reforming the international financial system, including the currency system; a new Bretton Woods agreement. It would be in that context that China could internationalize the currency. That would be the most desirable way forward.
Let me explain a little more. The international system has actually collapsed because it was built on the false belief that markets will regulate themselves. So you now need an international regulatory system, and we've made a good start with the G-20. But it can only operate within the existing rules of the International Monetary Fund. And those rules, and also China's representation in the IMF, needs to be changed, and the rising importance of China recognized. The recovery has been anemic; this was to be expected. But now, the increasing concern about rising sovereign debt is working against continued stimulus. And that increases the threat of a double dip. The rising concerns on sovereign debt increases the prospect of a double dip.
Caixin: Do you think the major economies have taken sufficient action to address fundamental problems of the world economy in the wake of the financial crisis, such as global imbalances?
Soros: No. The global imbalances have continued to increase. Notably, China continues to run a very big current account surplus. That is one reason why an appreciation of the renminbi would be desirable. The task of correcting those imbalances hasn't yet begun to be addressed.
Caixin: What would characterize growth patterns for the global economy thereafter?
Soros: I think that the future of the global economy, including continued Chinese prosperity, greatly depends on better international cooperation, particularly between the United States and China. I'm very worried about the recent trend in the opposite direction.
Caixin: In the longer term, how can the United States address its deficit problem?
Soros: The current account deficit of the United States is already declining, and I expect it to continue to decline. That is a very healthy development but a very painful one. It is particularly difficult to pursue this course as long as the dollar-renminbi exchange rate is fixed.
Caixin: Do you think the Fed will resort to higher interest rates this year? If the Fed sticks to lower rates for six months, what can other countries, especially China, do with their own interest and exchange rate policies?
Soros: I don't think there will be an increase in short-term U.S. interest rates, especially since it will be difficult to maintain fiscal stimulus. Therefore, the likelihood is that monetary stimulus will continue. If China allowed the renminbi to appreciate, some inflation would be exported to the United States and bring the day when the Fed would raise interest rates even closer. So that's yet another reason why allowing the renminbi to appreciate, one way or another, is desirable from a Chinese point of view. While quantitative easing in the U.S. continues, it's difficult for China to raise interest rates.
Caixin: In your opinion, how will the increased focus on climate change and green energy reshape the global economy?
Soros: Green energy ought to be a major source of growth for the world economy. But that requires international agreements, putting a price on carbon extraction. Without such a price, who is going to pay for the investments? I've recently put forward a proposal to use special drawing rights to finance green investments, and this has now been endorsed by the International Monetary Fund. And I hope it will have China's support.
Soros stakes bets on a cooler economy and global cooperation
By Wang Duan, Caixin Online
Last Update: 11:43 PM ET Feb 25, 2010
HONG KONG (Caixin Online) -- George Soros takes his coffee with a little milk before focusing on the foam currently frothing at the top of China's markets.
The 79-year-old financier and political activist sat down for an exclusive interview with Caixin at the Shangri-la Hotel on Feb. 4 in Hong Kong, where he also delivered a speech at Hong Kong University.
A hard landing for Chinese markets could come, Soros said, due to a significant increase in supply offset by falling demand. China's regulatory authorities have managed the situation well thus far, he said, but he's concerned about how various countries are maneuvering in the face of global imbalances.
Looking back at the past year's responses to the global financial crisis, Soros says lending by Chinese government-owned banks was indeed excessive, but that regulatory decisions to adjust reserve ratio requirements were appropriate.
"You know now," he observed, "people see bubbles everywhere."
But how should Chinese authorities react to all that bubbly foam in the future? Should they swipe away the suds? Why did the international financial system flounder in the first place, and what's the next step? Here's what Soros had to say:
Caixin: Do you think there are asset bubbles in China?
Soros: People see bubbles everywhere. Again, there is no question the financial stimulus has pushed up asset prices. Whether that is a bubble or not actually depends on whether it's going to be a hard landing or a soft landing. If it is a soft landing, then it is not a bubble. If it is hard landing, it will be a bubble. We'll only know if it's a bubble or not later.
Caixin: Do you think Chinese government actions will create a hard or soft landing?
Soros: It's a big question, because the first effect of restricting credit is the increase in the demand for credit, because everybody wants to rush, to get whatever credit is available. So it may take time before these measures actually slow down economic growth. And the longer it takes, the bigger the chance that it will turn into a hard landing. Because if the economy continues growing at this excessive rate until next year, you could have a significant increase in supply coincide with a decline in demand, and then you would have a hard landing. And that is why I think the government is vigilant in pushing hard to restrict credit.
Caixin: What is your attitude toward China now? Positive or negative?
Soros: I'm very cautious, until the economy cools off a little. When it does, I will be more optimistic again.
Caixin: In 2009, Chinese banks issued 10 trillion yuan in new loans. The government has said there will be another 7.5 trillion yuan in loans this year, although banks loaned more than 1 trillion yuan in January alone. Do you think this unprecedented credit growth will eventually lead to overheating, inflation and harsher policy tightening? Do you worry about the potential risk of non-performing loans in the medium- to long-term?
Soros: The overheating, the inflation, the harsh policy tightening is happening right now and it will continue to happen until the economy cools off. And with this explosion of credit, there are bound to be non-performing loans in due course. The extent depends on whether it is a hard landing or soft landing.
Caixin: In your opinion, the Chinese government should allow the yuan to appreciate, which you argue would resolve the problem of global trade imbalances but also deal with the inflation problem in China. If the yuan were to appreciate unilaterally, how could the government cope with hot money inflows?
Soros: I think the government would be very wise to allow the renminbi (yuan) to appreciate. This would be very useful from both the domestic and international perspective. The question is how to do it without creating an inflow of hot money. That's a very big problem. One way to do it would be to have a one-time revaluation and then to introduce a crawling peg, like a 5% margin based on the moving average of the last three months' exchange rates, and then actually allowing the renminbi to fall, as well as to rise. That would discourage speculation.
Caixin: In your view, will the Chinese government move to internationalize the yuan?
Soros: The government is unlikely to do it because the authorities are very cautious and don't like sudden change. And the same applies to the removal of international capital controls.
Caixin: What is the most important area for financial regulatory reform?
Soros: I would like to see an international agreement on reforming the international financial system, including the currency system; a new Bretton Woods agreement. It would be in that context that China could internationalize the currency. That would be the most desirable way forward.
Let me explain a little more. The international system has actually collapsed because it was built on the false belief that markets will regulate themselves. So you now need an international regulatory system, and we've made a good start with the G-20. But it can only operate within the existing rules of the International Monetary Fund. And those rules, and also China's representation in the IMF, needs to be changed, and the rising importance of China recognized. The recovery has been anemic; this was to be expected. But now, the increasing concern about rising sovereign debt is working against continued stimulus. And that increases the threat of a double dip. The rising concerns on sovereign debt increases the prospect of a double dip.
Caixin: Do you think the major economies have taken sufficient action to address fundamental problems of the world economy in the wake of the financial crisis, such as global imbalances?
Soros: No. The global imbalances have continued to increase. Notably, China continues to run a very big current account surplus. That is one reason why an appreciation of the renminbi would be desirable. The task of correcting those imbalances hasn't yet begun to be addressed.
Caixin: What would characterize growth patterns for the global economy thereafter?
Soros: I think that the future of the global economy, including continued Chinese prosperity, greatly depends on better international cooperation, particularly between the United States and China. I'm very worried about the recent trend in the opposite direction.
Caixin: In the longer term, how can the United States address its deficit problem?
Soros: The current account deficit of the United States is already declining, and I expect it to continue to decline. That is a very healthy development but a very painful one. It is particularly difficult to pursue this course as long as the dollar-renminbi exchange rate is fixed.
Caixin: Do you think the Fed will resort to higher interest rates this year? If the Fed sticks to lower rates for six months, what can other countries, especially China, do with their own interest and exchange rate policies?
Soros: I don't think there will be an increase in short-term U.S. interest rates, especially since it will be difficult to maintain fiscal stimulus. Therefore, the likelihood is that monetary stimulus will continue. If China allowed the renminbi to appreciate, some inflation would be exported to the United States and bring the day when the Fed would raise interest rates even closer. So that's yet another reason why allowing the renminbi to appreciate, one way or another, is desirable from a Chinese point of view. While quantitative easing in the U.S. continues, it's difficult for China to raise interest rates.
Caixin: In your opinion, how will the increased focus on climate change and green energy reshape the global economy?
Soros: Green energy ought to be a major source of growth for the world economy. But that requires international agreements, putting a price on carbon extraction. Without such a price, who is going to pay for the investments? I've recently put forward a proposal to use special drawing rights to finance green investments, and this has now been endorsed by the International Monetary Fund. And I hope it will have China's support.