China’s state-run media has escalated its rhetoric against market speculation on its currency and economy, with a top mouthpiece claiming billionaire investor George Soros had “declared war against China”.
The strong words come amid a policy dilemma for Beijing’s central bankers. One one hand, they face expectations of further interest rate hikes by the US Fed and further monetary easing in Japan. On the other hand, they face a slowdown in the domestic economy that has come at the same time as China tries to restructure its economic drivers. So the central bankers face a stark choice – keep the yuan stable or revive the economy.
Both the Hong Kong dollar and the yuan fell yesterday morning as speculators returned to the market and the two central banks stayed away. The Shanghai stock market index lost 6.4 per cent to hit a 13-month low.
Soros said last week that a hard landing in the Chinese economy was “unavoidable” and he was shorting Asian currencies.
In a move to manage the fallout, Beijing is using its state media to fend off speculators.
In an English-language commentary published shortly after Soros made his comments at the World Economic Forum in Davos, Switzerland, the mainland’s Xinhua news agency warned and even threatened those who kept bearish views on China’s growth and currency prospects.
“Reckless speculation and vicious shorting will face higher trading costs and possibly severe legal consequences,” it said.
Other state media joined the chorus in the last couple of days.
Mei Xinyu, a researcher with the Ministry of Commerce, said in a front-page opinion piece in the overseas edition of the Communist Party’s mouthpiecePeople’s Daily yesterday that Soros had “publicly declared a war against China”, but that Soros’ challenge to the yuan and Hong Kong dollar would not succeed.
It’s not clear quite how much financial firepower Soros could summon to start such a battle, but even so, his words and actions could swing public opinion and be harmful for China, said Chen Xingdong, chief China economist with BNP Paribas in Beijing.
“It’s like a hostile force announcing ‘I am invading you’. China has reason to be nervous,” Chen said.
It’s like a hostile force announcing ‘I am invading you’. China has reason to be nervous
Even for a US$10 trillion economy with US$3.3 trillion in foreign exchange reserves, a man who once brought the Bank of England to its knees with a short is not to be taken lightly.
“If he can mobilise enough money, he still can do something – Soros doesn’t need to break down the Hong Kong dollar peg, he can make enough profit from stock market and foreign exchange market swings as we’ve seen last week,” said Ding Shuang, chief China economist for Standard Chartered in Hong Kong. “It won’t be as dramatic as in 1998 – Soros is trying to make money not a fight,” Ding added.
Global investors are closely watching the outcome of the US Federal Reserve meeting due to end today, the first policy meeting after it hiked interest rates last December to normalise monetary policy.
In Asia, speculation has grown the Bank of Japan will announce an expansion of quantitative easing policies to sustain growth during a two-day monetary policy meeting ending on Friday.
On the domestic side, an ongoing stock market rout and a persistent economic slowdown that come despite the central bank’s recent liquidity injection into the banking system, have increased pressure on the People’s Bank of China to cut the reserve requirement ratio or even interest rates. But in doing so, the bank risks exacerbating weakness in the yuan.
A leaked memo from a PBOC meeting last Friday showed the central bank was reluctant to tinker with the reserve ratio to avoid “sending a strong policy signal” that could trigger fear and capital flight. It emphasised the need for a stable yuan when managing domestic liquidity.
“China’s monetary policy is indeed becoming more complicated and constrained, and the future direction is harder to predict,” said Louis Kuijs, an economist with Oxford Economics.
The central bank is just burying its head in the sand
“The new emphasis on the exchange rate in terms of a basket rather than against the US dollar should help somewhat with dealing with the problem of divergent monetary policy globally. But the pressures on the exchange rate against the US dollar would rise the more China’s economy slowed and the more that US monetary policy diverged from that in Europe and Japan.”
A Chinese economist said a reserve ratio cut was not the cause of depreciation expectations.
“What we’ve seen now is very similar with the first half of 2014. The central bank intervened a lot and missed the best chances to cut interest rates to shore up growth as a rate cut then would have been considered distrusting of reform,” he said.
“The central bank is just burying its head in the sand,” Ding said. “Eventually, the central bank just can’t resist and cuts in required reserve ratios are unavoidable.”
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