George Soros, of Soros Fund Management, is one of the world’s most widely respected investors. His opinions on all matters economic and financial make for excellent informed reading. His net worth, estimated by Forbes at $9 billion, ensures his status as one of the most successful investors in history and one of the wealthiest men in the world. The 79-year-old recently granted an interview in which he explains his stance on China’s economy and currency, his outlook for interest rates in the US this year, and his views on the US fiscal deficit.
The Chinese economy has been steaming ahead with seemingly no end in sight. However a massive stimulus program and rapid increases in bank lending have seen a host of commentators call China a bubble, most notably James Chanos of Kynikos Associates. Soros, however, says, “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.”
On the Chinese government’s efforts to control credit and bank lending, Soros said, “…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.”
“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 Chinese currency has come under tremendous international pressure recently, and Soros agrees with general sentiment that the government should allow the unit to appreciate. “I think the government would be very wise to allow the renminbi (Yuan) to appreciate”, he said. “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.”
In terms of the major economies of the world and their current health, Soros does not believe sufficient action has been taken. “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.”
Soros also has an unusual, and in my opinion correct perspective on the US deficit and the probability of the Fed raising interest rates this year. Soros said, “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. 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.”
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