George Soros is a rich and powerful man. He is chairman of Soros Fund Management which has brought huge returns for investors over several decades and he is known as the man who “broke” the Bank of England back in September of 1992 when he risked $10 billion on a single currency speculation by shorting the British pound. He turned out to be right, and in a single day, the trade generated a profit of $1 billion or as was later reported, closer to $2 billion.
Soros is also been accused of speculative attacks that triggered the 1997 Asian financial crisis when he took a large bet against the Thai baht.
Soros is now targeting China by asserting that he shorted a large volume of Asian currencies—mainly the Chinese renminbi and the Hong Kong dollar.
Soro’s criticism of the world’s second largest economy began with a speech earlier this month when he said China's economic situation "amounts to a crisis," drawing parallels with the dark days of 2008. He pointed to an estimated $676 billion that China ‘lost’ in 2015, more than the $111 billion that fled all emerging markets -- including China -- in 2014.
At the World Economic Forum in Switzerland, last week, the billionaire and famous philanthropist blamed the Chinese economy for the bearish outlook weighing on global markets and suggested that a ‘hard landing’ for China involving a disruptive collapse in the country's economic growth was "practically unavoidable."
China itself reported last week that it has had the slowest annual economic expansion in 25 years and that it is uncertain how to break the cycle as nervous investors pull their money out of the country in search of better returns elsewhere. This has been putting even greater downward pressure on the yuan.
It's pride notwithstanding, Beijing has every reason to take Soros’s opinion seriously. Over the decades, some of his biggest bets have paid off and China is well aware of its current financial market situation.
The normally stable yuan, whose value is closely controlled by Beijing, has come under pressure in recent weeks and months in overseas markets and from capital outflows. Authorities have injected massive amounts of cash to defend it.
China is trying to keep Soros at bay and has been posting scathing declarations in the media against his public currency inferences and has accused him of “declaring war” on the yuan. Although Soros didn't explicitly mention the yuan in his statement, Beijing has issued a blunt warning to speculators not to bet on a falling currency.
The current display of vitriol has not succeeded in convincing most investors who question how long the heavy intervention by the People's Bank of China can continue. China still has $US3.3 trillion in foreign currency reserves – the largest in the world – but about one-third of this is tied up in illiquid investments. If capital continues to flow out of the country at the current pace, even China will eventually have to start worrying about the drop in its foreign currency reserves.
Yuan Devalued
Last August, China surprisingly devalued the yuan and then in December the PBOC alarmed investors again by signaling it would set the level of the yuan against a basket of currencies rather than just the US dollar. This triggered fears again that China was paving the way for a further weakening of its currency. Many investors, however, see this is just an interim strategy of the PBOC and believe that the bank is committed to a free float of the currency which would allow market forces to determine its level.
The government, however, is uncertain of the success of letting the yuan float freely and is concerned that it would cause a huge deflationary shock to the global economy.
Since China is the world's largest exporter a 20 percent or so drop in the yuan would push down the price of Chinese exports and would squeeze revenue and profit for firms outside China, putting considerable pressure on their costs.
In addition, a sharp drop in the yuan would make it extremely difficult for Chinese firms to meet the interest payments on the $1 trillion in U.S. dollar denominated debt which they have accumulated.
If it decides to continue propping up the yuan, the central bank will either have to raise interest rates, which would cause growth to slow even more sharply, or introduce much stricter capital controls than are in place now.
Whether Beijing allows a free-floating currency or decides to defend the yuan, using central bank intervention backed up by tight capital controls, it will have to communicate clearly its new policy to the market or risk continued currency instability as investors take bets against the yuan.
From Daily Forex.
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