In the fall of 1992, George Soros rose to prominence by winning his gamble against the British Pound, earning not only a place in history but, $1.5 billion in profits. Today, many prominent names in the hedge fund industry are seeking similar results at the expense of the Chinese Yuan Renminbi (RMB).
The fluctuation in the value of the RMB against the U.S. dollar has been modest when compared to Euro (EUR) against the U. S. dollar, which begs the question, why target the RMB rather than the EUR? For example, On May 1st, 2011, the dollar reached its lowest point in the last five years against the EUR with $1 buying 0.6787 EUR. Today, $1 will buy .9209 EURs. In other words, the value of the dollar against the EUR has risen 35.69 percent. On the other hand, the dollar reached its five year low of 6.0810 against the RMB on May 24th, 2015. On January 31st, 2016, the dollar bought 6.5802 RMB, an 8.21 percentage increase. This suggests that the RMB is more than four times less volatile than the EUR.
So Why Target the RMB?
The reasons are many. For one, China’s economic engine is losing steam. While growth is still robust by Western standards, year-over-year gross domestic product stood at 6.9 percent, China’s weakest performance since 1990. China’s GDP is predicted to continue to shrink through 2016.
Additionally, China’s stock market is forecast to see continued declines through 2016. Other worrisome signs include the Manufacturing Purchasing Managers Index, which has been below 50 for 6 straight months. This is significant because anything below 50 is regarded to be indicative of a contracting manufacturing sector. Another statistic which bodes ill for China (and South Korea) is that South Korea’s exports to China fell 21.5 percent year-over-year. China is South Korea’s largest trading partner and weakening Chinese demand for South Korean consumer goods is a tell that should not be ignored. Another factor is the relative isolation in which China’s central bank operates.
While the points highlighted above do not encompass all the issues facing China, they provide a representative sample of the direction things are moving and offer insight into the reasons these high profile hedge funds are betting against the Yuan Renminbi.
Will They Succeed?
Economic conditions in China certainly seem to favor shorting the RMB, but the global economy is much different today than in 1992. Central banks are no longer in a strong position to thwart speculators largely because of the enormous growth in foreign currency trading which can top $5 trillion per day. China’s weakness lies in its central bank’s lack of ability to work collectively with other central banks, which is much the same position the Bank of England found itself in the early 1990’s.
How this gambit will play out over the next couple of years is anyone’s guess. However, one thing is likely—George Soros will retain his number one spot for having made the most money on a currency trading strategy in the history of hedge funds.