The Korean won and Currency war between China and Soros

As renowned hedge fund managers including George Soros and Bill Ackman bet against the Chinese yuan, hedge funds and the Chinese financial authorities are having war over the currency. It was triggered by Soros’s remark at the World Economic Forum in Davos on Sunday, “A hard landing is practically unavoidable. I bet against Asian currencies (against the U.S. dollar), I bought U.S. treasury bonds at the end of last year.” China thinks that he who made a tremendous amount of money by betting on the yuan in the past shorted on the yuan and the Hong Kong dollar this time, causing a chaos in the Chinese stock markets.

The People’s Daily, the official mouthpiece of the Chinese Communist Party, published a front-page editorial titled “Declaring war on China’s currency? Haha” on Tuesday, claiming that Soros' speculative attack on the yuan and the Hong Kong dollar will not succeed. Criticizing Soros, Chinese Premier Li Keqiang, the commander-in-chief of the Chinese economy, added on Thursday, “The Chinese economy is in the reasonable range.” If Beijing takes advantage of the world’s largest foreign currency reserve worth 3 trillion U.S. dollars, it could comfortably support the value of the yuan and block capital outflows in the short term. However, if a global speculative capital attacks the yuan with Soros, it will be hard to predict the long term result.

The recent event unveiled China’s opaque foreign currency market, its central bank subject to the communist government and the inefficiency of policies that cannot beat the market. The Wall Street Journal said, “If it controls capital outflows, the status of the yuan as a global currency will be threatened.” The Financial Times said, however, “The control of capital outflows in emerging markets is no longer a taboo.”

The war between Soros and China is also a threat to Korea. The Korean economy is highly dependent on China’s and the Korean won is a “proxy currency” moving in the same direction with the yuan. If the outflow of the yuan exacerbates, the pace of the outflow of the won could accelerate. It is appalling to think that Soros’ bet against Asian currencies mean that the won is in the scope of the hedge fund’s attack.

It is myopic to use foreign currency reserves to control the exchange rate for a short term goal. It is also not the right approach to increase the reserves significantly based on the belief that a rising won against the dollar can boost exports. If Korea calls for a “currency swap” to the world, it will not be a wise approach, either. Korea needs to seek an advanced balancing approach while staying quiet.