China’s decision to keep its currency weak has caused the government to lose control of inflation and risks fuelling wage-price gains, billionaire investor George Soros said.
While the policy helped insulate China from the financial crisis in 2008, the world’s second-biggest economy has missed its chance to allow the yuan to appreciate to tame inflation, Soros, chairman of Soros Fund Management LLC, said yesterday at a conference in Bretton Woods, New Hampshire.
“It would be very advantageous to allow the currency to appreciate as a way of controlling inflation,” Soros said. “The authorities missed that opportunity. You now have inflation somewhat out of control, and causing some serious danger of wage-price inflation.”
The yuan gained 4.6 percent against the U.S. dollar in the past two years, the second-smallest gain of 10 Asian currencies tracked by Bloomberg, even as economic growth rebounded and foreign-exchange reserves jumped to a record. Inflation accelerated to 5.2 percent in March, exceeding government targets for a ninth month, according to the median estimate in a Bloomberg News survey.
The yuan’s gain since April 2009 compares with a 31 percent advance for the Indonesian rupiah, a 22 percent climb by the South Korean won and a 21 percent jump by the Singapore dollar. Only the Hong Kong dollar, which is pegged to the U.S. currency, has appreciated less than the yuan.
China’s currency was little changed at 6.5367 per dollar as in Shanghai, trading near a 17-year high. Twelve-month non-deliverable forwards climbed 0.09 percent to 6.3775 per dollar in Hong Kong, reflecting bets the yuan will gain about 2.6 percent, according to data compiled by Bloomberg.
China has resisted pressure from U.S. officials to let the yuan appreciate more rapidly, rejecting Treasury Secretary Timothy F. Geithner’s argument that a stronger currency would make it easier to manage inflation pressures.
“While exchange rates can be an effective tool to contain inflation in some countries, I don’t think that’s the case for China,” said Li Cui, chief China economist at Royal Bank of Scotland Plc in Hong Kong. “It’s not so surprising that we are seeing higher inflation in China as price growth is mainly driven by strong domestic demand, while imported inflation only plays a marginal role.”
China’s economic growth accelerated to 9.8 percent in the fourth quarter, driven by a pickup in industrial production and retail sales. The government will report first-quarter economic data on April 15.
The People’s Bank of China raised interest rates four times and boosted banks’ reserve requirement ratios six times since the third quarter to help contain inflation. HSBC Holdings Plc said last week the possibility of another rate increase is rising. Credit Suisse Group AG forecasts the benchmark one-year deposit rate, which has risen 1 percentage point to 3.25 percent, will climb another 1.5 percentage points by the end of the year.
“This cannot continue indefinitely,” Soros said. “There’s great resistance with the government mechanism to relax the system which serves the interest in power very well. I find that the critical question for the future of China.”
A stronger currency would combat inflation by making foreign goods cheaper in China. The nation reported its first quarterly trade deficit in seven years yesterday, driven partly by rising commodity prices. Inbound crude oil shipments rose 12 percent by volume and 39 percent by value, while iron-ore imports rose 14.4 percent by volume and 82.5 percent by value.
Soros, 80, reportedly made $1 billion in a successful bet in 1992 that Britain would fail to keep its currency in a European exchange-rate system that pre-dated the euro. Other successful trades included a bet that the deutsche mark would rise after the collapse of the Berlin wall and a wager that Japanese stocks would start to tumble in 1989.
He spoke at a conference sponsored by the Institute for New Economic Thinking, which Soros helped found and supports.
U.S. and European officials met in Bretton Woods in 1944 to draw up rules that governed much of the world economy for almost three decades. Nations agreed to fix exchange rates, establish the International Monetary Fund and start the process of rebuilding Europe’s economy in the aftermath of World War II by encouraging coordinated economic policies.
The Bretton Woods era ended in 1971, when inflation forced the U.S. to abandon the dollar’s peg to gold, an anchor of the system, heralding the era of floating exchange rates. The Bretton Woods agreement had linked currencies around the world to the price of gold and restricted their fluctuations versus the dollar, requiring intervention by participants to comply.