Soros in China

The Chinese media have been gunning for George Soros for predicting a ‘hard landing’ for the country’s currency. A headline in the People’s Daily is mild by comparison with some of the invective: ‘Short China and you short yourself.’ But who believes Soros is getting ready to short the renmibi, as he did sterling in 1992? He said nothing in Davos last month about betting against the renminbi.

The western financial press don’t appreciate China’s aggressive-defensive stance: they imagine it proves their point that the currency, and the economy, are heading for a fall. But they may well be wrong. China is not reacting to Soros; China is using Soros. John Fairbank and his disciples at Harvard’s China studies ‘school’ used to see China’s policies as purely reactive to developments in the West: an influential view for most of the 20th century. It still prevails among western economists, but Sinologists have changed their thinking.

In 1997, Paul Cohen’s Discovering History in China challenged Fairbank’s thesis on grounds of ethnocentric distortion. In China, the West is never as important as it supposes, even if the Chinese keeps a wary eye on allies and predators. Applying the shock therapy prescribed by the Washington Consensus 25 years ago, for example, would have doomed China. Instead, Beijing crafted its own economic model: limiting both foreign portfolio flows and privatisation, encouraging foreign direct investment and experimenting with the rise of an entrepreneurial class.

The government’s posture hardened last week when state outlets announced that there will be no dramatic fall in the value of the renminbi. This has been greeted with derision by western speculators and their favourite columnists in Forbes, Fortune and Barron’s: are the Chinese reckless enough to intensify speculative pressure by announcing what is, in effect, a line in the sand? The answer, from the West, would appear to be yes. But this doesn’t allow for patriotic sentiment as a stabilising mechanism. I was at a Chinese New Year party last week where the CEO of a start-up addressed his 300 employees: ‘We don’t know next year’s challenges. Soros just attacked China. We will support our government. We have a responsibility to society. Now we all have to work harder.’

China has not backed itself in a corner by announcing the destiny of its currency to the rest of the world. Its resolve merely alerts investors who wish to bet on a hard landing that they do so at their own risk. Some Chinese will be swayed by patriotic feelings, but there will be plenty of local speculators who on cold rational analysis decide that caution is a wiser approach.

Assertive, anti-Soros headlines are part of the government’s strategy to ease China through its slowdown by discouraging volatility in currency markets. In any event the country’s currency regulations already restrict unfettered trading and capital account convertibility; amassing a position in preparation for a prolonged attack on the renminbi is technically difficult. And besides, most of the money that could leave the country already did so in the last 18 months. On the other hand, selling renminbis to the tune of $43 billion is still fine if the purpose of it is the acquisition of a foreign firm like the Swiss agribusiness giant Syngenta.

With American growth at 0.7 per cent, China’s ‘new normal’ 6 per cent growth isn’t looking bad. Not long ago, China’s great challenge, far from a depreciation in the value of the renminibi, was the risk of exuberant appreciation. When the renminbi picks up, as it will, state media will be on hand to smooth out the attendant dangers and stabilise the situation, this time from the opposite direction. And Soros, once laopengyou (an ‘old friend’ of China), will ingratiate himself again before long.