China’s yuan-dollar exchange rate has been the secret to China’s success according to George Soros speaking to the Financial Times.
The trade surplus created by the yuan-dollar peg allowed China to cruise through the financial crisis relatively unscathed and massive currency reserves it created provide a powerful bargaining position when China deals with other countries.
However, the cat’s out of the bag and now everybody wants to employ China’s currency strategy. Capital controls are in fashion.
“If China continues in this, the other countries will be driven to adopt also a two-tier system. Brazil is beginning to move in that direction and I think the others will have to follow.”
FT’s Martin Wolf:
“So you’re actually thinking it’s quite likely that we move to a world of capital controls.
“I think there is a considerable chance of that happening, but if it happens in an uncoordinated, in a unilateral, way that could lead to trade wars, retaliation, and then we really would have a breakdown.”
China needs to understand that fixing the global imbalances caused by its currency peg is in its own interest. As the latest trade war rumblings show, China cannot continue to rise without addressing the problems of its trade partners. Thus China, not America or Europe, is actually in the economy’s driver’s seat.
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.
You can also find video of Mr. Soros being interviewed here.
(H/T Paul Kedrosky)