SHANGHAI – When the financier George Soros attacked the British pound in 1992 and famously ‘broke the Bank of England’ he was trading on a conviction that the currency was misaligned.
Britain devalued after squandering its reserves in a vain defense. Mr. Soros walked off with $1 billion or more. To the surprise of many, though, the U. K. economy soon picked up once the pound found its proper level.
China’s raging battles with currency speculators are unlikely to end as happily for the country. That’s because turmoil in the currency markets reflects a much more perilous imbalance than an overvalued yuan: China is now lopsidedly dependent on ever larger inputs of local bank credit to keepsputtering growth from declining further.
The country is already littered with ‘zombie’ factories, empty apartment blocks that form ghostly suburbs, mothballed power stations and other infrastructure that nobody needs. But yet more wasteful projects are in the pipeline, even as the government talks about cutting industrial overcapacity.
‘That’s the misalignment – everything else is noise,’ says Rodney Jones, the Beijing-based principal of Wigram Capital Advisors, who was a partner at Soros Fund Management during the 1990s.
This post was published at David Stockmans Contra Corner on January 26, 2016.
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