Will This Spark a Global Economic Collapse?
Billionaire George Soros “broke the Bank of England” 23 years ago by shorting the pound. Now he’s betting against another country. According to media reports, the legendary investor is worried this country could spark the next economic collapse.
There’s good reason to be worried. Investor and hedge fund manager, George Soros, told Bloomberg he is going to be shorting the Chinese yuan. Because of his notorious track record, Chinese authorities are spooked. (Source: “China accuses George Soros of ‘declaring war’ on yuan,” The Guardian, January 27, 2016.)
The yuan to USD exchange rate had a good run up until 2014. China’s growth was firing on all cylinders and was on its way to becoming the biggest economy in the world. Then the inevitable happened. Growth started losing its fuel.
Controlling the strings was China’s central bank. One misstep after the other, the People’s Bank of China (PBOC) aggravated the economic troubles. The bank began cutting rates at the end of 2014, while injecting more money into the system. Household and corporate debt spiked and share prices shot up on the back of monetary easing.
The economy got inflated into a bubble and could no longer sustain the vulnerabilities. Meanwhile, the yuan kept losing its value to the dollar. This became the cornerstone of China’s economic woes, which peaked in the summer of 2015. The result was devastating! The world witnessed the biggest Chinese stock market crash. Following this was a devaluation in the yuan to dollar rate.
The dust soon settled, but China continued its confusing policy. So history was bound to repeat itself.
This year began with widespread turbulence across all stock markets. The major culprit was, once again, the Chinese markets. The second episode of the Chinese crash at the beginning of this month had a ripple effect across all global markets. But its worst impact was felt at home where the average Chinese investor lost all faith in the markets.
Once again making it worse was the PBOC. Following the crash, China further cut the offshore yuan to USD exchange rate. The manipulation put more downward pressure on the exchange rate between the two currencies. The yuan to USD rate nosedived again.
Markets faced a major sell-off as the Chinese made a run for cover. Seeing their currency depreciate, more and more people started converting their savings to dollars. This has doubled down the negative effect.
The PBOC is now facing a shortfall of dollars. The higher demand for the dollar and increased supply of the yuan is continuing to push down the yuan to dollar exchange rate. And George Soros is all set to make some more millions off of it. (Source: “Chinese Consumers Race to Buy Dollars as Yuan Slides,” The Wall Street Journal, January 12, 2016.)
The Bottom Line on the Yuan to USD Rate
If this trend continues, the yuan to dollar exchange rate will continue to tank. It won’t be wrong to say that the Chinese government has been fueling the weakening in the yuan. The only way this can stop is if the government and the central bank work in cohesion and stop confusing the markets. Until then, there’s no bottom in sight for the yuan/USD exchange rate.
Watch out! China is on the verge of economic collapse. George Soros might break another bank.