Bracing for the worst
The Chinese government declared war on hot money. Directly targeting George Soros, the founder and chairman of Soros Fund Management, the People’s Daily in an editorial warned him against betting on declines in the value of the Chinese yuan amid deepening worries over an alarming slowdown of the world’s second-largest economy. The state media vowed that Soros’ bet would definitely fail. In an interview at the World Economic Forum in Davos, Switzerland, last week, the hedge fund guru said he short-sold a massive amount of U.S. stocks and major Asian currencies, adding that “a hard landing is practically unavoidable” for China.
China tries to protect the yuan by using its over $3 trillion in foreign reserves. But hot money can hardly be controlled. That’s why it’s called hot. Even before a full-fledged attack begins, China’s foreign reserves are rapidly shrinking. The Wall Street Journal estimated that China has lost $364 billion over the last six months. Considering that Beijing stepped into foreign exchange markets to prod up the value of the yuan with its huge U.S. dollar reserves, the loss could have been even bigger. Now, the prospect of China sparking a global financial crisis is increasingly gaining momentum.
Soros has accumulated wealth by short-selling relatively weak currencies. The British pound and Italian lira suffered great damage from the hedge fund tycoon’s shorting activities. An armada of global hot money moves at his fingertips. If the Chinese economy continues to show signs of slowdown - or even if China’s reaction goes off the track slightly - Soros would relentlessly exploit its vulnerability. As the yuan has not yet earned its status as a key currency in the world, it can hardly withstand his tenacious attack.
Of course, it’s too early to predict the winner of this contest. But whomever wins, international financial markets will have to pay a price. Korean markets, which have been in sync with their Chinese counterparts, cannot avoid repercussions. Our economic team led by Yoo Il-ho, the new deputy prime minister for the economy and finance minister, must roll up its sleeves. They should prepare for a worst-case scenario. They must speed up the process of reinforcing our economic fundamentals by restructuring our corporate sector, including killing zombie companies. A perfect storm may be heading to Korea.
JoongAng Ilbo, Jan. 29, Page 30