George Soros, among the most famous investors in the world, recently made controversial remarks about China’s economy. He said last week on the sidelines of the World Economic Forum in Davos that “a hard landing is practically unavoidable” for China’s economy. While such pessimistic warnings have previously come from a variety of investors, Soros’ prediction is particularly interesting given his past success in crushing several countries’ currencies, including his famous 1992 bet against the British pound. Will Soros now succeed in betting against China’s currency?
Of course, we do not know if Soros is now really betting against the Chinese currency, the renminbi (RMB), because he did not reveal his investment plans. It could be the case that he was just speaking off the cuff or even bluffing a bit, with the hope that his words could have some real impact on the RMB. Either way, it seems like his bet against China’s economy, if real, will fail big time for a set of reasons.
While it is no longer a surprise that China’s economy is slowing down, it should be noted that China’s GDP growth in 2015 was still at 6.9 percent, a proud number for any large economy. Some scholars have raised the question of just how accurate China’s GDP numbers are and these concerns are legitimate. But even after factoring all these concerns, China’s GDP growth was still impressive. This year, we may well see an even lower number like 6.5 percent. Yet even this is still good enough to keep China’s economy functioning effectively.
Given this, we can then understand the recent depreciation of the RMB. Actually the currency’s depreciation is both good and bad for China. It is good because many of China’s small and medium size exporting firms will benefit a lot from a lower RMB, but it is bad for China’s consumers and external investors. If Soros thinks that the RMB will decline gradually this year, then perhaps many would agree with him. But if his bet is that the RMB will drop dramatically, then he is seriously wrong.
One obvious weapon to prevent Soros’ hard-landing scenario is China’s massive foreign exchange reserve, which currently stands at about $3.3 trillion. Today’s China is not like Thailand back in 1997, which was a weak economy under attack by Soros’ funds. Speculative investors are like sharks and they do not attack strong and big fish.
More importantly, the Chinese government has firm control over capital movement. This is the most fundamental difference between China’s financial system and other systems. If necessary, stricter limitations can be imposed on capital movement, thus significantly raising the barriers against speculative investors getting a hold of the RMB.
There is no doubt that China’s whole economic system is undergoing a fundamental and difficult period of structural change, which could take several years. Once this process is completed, we might see a more robust and dynamic Chinese economy emerge — one that relies on innovation more than exports. The most important thing for the Chinese government between now and then is to keep growth and the RMB steady. That also includes driving away speculative investors while improving China’s financial system.