Soros: China Uses Currency to Transfer Wealth to its Government

George Soros, famous billionaire investor and currency speculator, was being honored as “Globalist of the Year” earlier this week and took the opportunity to describe China’s rising influence, how it’s been accomplished it, and the uncertainty of how it’ll use its new-found power. The most interesting part is how the nation leverages its trade surplus to accumulate wealth to the government.

From The Wall Street Journal:

“…China continues to function effectively and achieve a large trade surplus, Soros said in a speech Monday. “The crisis there was purely external and the system unscathed,” he said. Current systems of global governance are on the brink of breaking down as the G20 group of advanced and emerging economies falls prey to internal tensions, he said. China has become the ‘motor’ of the global economy and political instability there would have global consequences, he said…

“…China’s undervalued currency is also at the core of the effectiveness of its government because it enables the government to essentially transfer wealth from those earning it to the government in the form of its roughly $2.4 trillion in foreign exchange reserves, he said. ‘It makes for a powerful government in China,’ he said. The Chinese government has more policy options than the U.S. because it has a substantial trade surplus, he said.

“China must begin to assume more responsibility for helping shape global financial order, Soros said. ‘China has risen very rapidly by looking after its own interest,’ he said. ‘They’ve now got to accept the responsibility for world order, and therefore the interests of other people, as well,’ he said. ‘If they persist in their present course, it will lead to conflict,’ he said.”

There’s little new in his perspective about how, despite the financial crisis, China has continued growing and innovating while more developed economies have become stagnant and mired in unsustainable debt. What is interesting is how Soros points to currency as China’s main means of transferring wealth from “those earning it to the government,” because the People’s Bank of China controls the renminbi supply and accumulates the dollar-denominated wealth generated by exports. In this way, even though taxation isn’t as effective in China as in many industrialized nations, the government has managed to grow an over $2 trillion war chest.

How China chooses to assert its increasing influence, given its immense financial assets, remains is the question of our time. You can read more details in The Wall Street Journal’s coverage of George Soros on how global power and influence are shifting from the US To China.


Rocky Vega,
The Daily Reckoning