Ad Hoc Commentary – China is overreacting to Soros, should shed light on currency policy instead

“Lee has a toy factory. He sells his toys in equal volumes to Jacques and Joe. One day, Jacques committed suicide, and Lee soon lost 50% of his export market. Lee soon ran into financial troubles because he couldn’t service his business debts due to his loss of income from Jacques. What is the main cause of Lee’s financial troubles?”

It is likely we have two camps of people. The ‘internally driven camp’ would probably conclude it’s the debt. The ‘externally driven camp’ would probably conclude it’s the suicide. There are two sides to any story, and this is the case with China today.

In our 2015 outlook, we alleged that Europe will destroy itself, or we might say Jaques will commit suicide:

In the Feb 2016 issue of The New York Review of Books, George Soros says that the EU is on the verge of collapse:
“…the EU is on the verge of collapse. The Greek crisis taught the European authorities the art of muddling through one crisis after another. This practice is popularly known as kicking the can down the road, although it would be more accurate to describe it as kicking a ball uphill so that it keeps rolling back down. The EU now is confronted with not one but five or six crises at the same time…”

We know that Europe and America are China’s two main export markets. If Europe collapses, China will have a hard-landing that is externally driven. The mainstream press likes to focus on the internal debt, but quite frankly, if we read widely, Soros is more focused on the meltdown of Europe. You can see this from his list of past articles:

To be sure, Soros is not worried about China:
“…Soros also told Bloomberg at Davos that he believed China could “manage” its hard landing, saying, “It has resources and greater latitude in policies, with $3 trillion in reserves.”…”

So, in yours truly mind, the overreaction to Soros will likely have the opposite effect of bringing more fear to the market. Ever heard of reverse psychology?

1. Investors will take notice when you try to belittle Soros:
“…Titled “Declaring war on the Chinese currency? Haha,” the front-page editorial was written by Mei Xinyu, a researcher at the Ministry of Commerce. The editorial called Soros a “financial crocodile” (a long-time sobriquet for Soros in China) that had “publicly declared war on China.”…”

2. Investors will take notice when you investigate officials talking up the yuan:
“…In a strange twist to the China-Soros tale, the chief of China’s National Bureau of Statistics, Wang Baoan, was among the officials talking up the yuan in the wake of Soros’ comments. On Tuesday, Wang gave a speech saying that there was “no basis for long-term yuan depreciation.” Just hours later, it was announced that he had been detained in a corruption investigation…”

If China really wants to stabilize her equity markets, she would either need to:
1. be transparent on how far would the Chinese devaluation will go. This is like the Plaza Accord, or
2. quietly leak out the full details of the managed currency float. If you really know who to talk to in Singapore, you will probably be left with the impression that the composition of the currency basket is more an open secret, than a state secret.

The worst thing to do is to leave the market in a suspense. That will only lead to unnecessary volatility, that would eventually be damaging.

Good luck in the markets.