Wealth

George Soros Hands Over Financial Empire Signaling End of an Era for International Currency Speculation

  On September 11, 2023, a special meeting on the national foreign exchange market self-regulatory mechanism was held.
  The foreign exchange market self-regulatory mechanism was established in 2016, and the entities involved are mainly foreign exchange and related market participants. Judging from the name, the conference has a strong market-oriented flavor, but considering the current special international financial situation, the content discussed at the conference is undoubtedly very important.
  The meeting discussed the recent foreign exchange market situation and RMB exchange rate issues. When it came to maintaining the basic stability of the RMB exchange rate, the meeting mentioned that we should take action when it is time to resolutely correct unilateral and procyclical behavior, and resolutely deal with behavior that disrupts market order. The meeting also pointed out that we must resolutely put an end to speculation, inciting customers and other behaviors that disrupt the order of the foreign exchange market.
  These wordings are distinctive and fully express the determination and confidence of the financial regulatory authorities to stabilize the RMB exchange rate. They also contain a huge amount of information.
  Since September, the RMB exchange rate has experienced some fluctuations, with the onshore and offshore RMB exchange rates once falling to the lows of the year. Some market institutions believe that a small number of international financial speculators may engage in short-selling behavior in the offshore RMB market.
  After the meeting, the exchange rates of both onshore and offshore RMB rebounded. The rebound in the exchange rate fully demonstrates that the RMB currency value has a solid real economic foundation and that China’s financial regulatory authorities have sufficient experience and capabilities in stabilizing the RMB exchange rate.
  But it is undeniable that the current international financial market is indeed in a state of volatility, and some new trends have emerged in the field of cross-border capital flows and international investment.
Soros’ retreat

  George Soros was once a common “enemy” of the monetary authorities of many countries and economies, but he has gradually retired.
  In June 2023, Soros handed over his financial empire to his 37-year-old son Alex Soros. Soros did not hand over his career to his older sons, but to his fourth son, who was less than 40 years old. Some interpretations only regard this matter as a matter of succession of the family business. In fact, it also represents the end of the “Soros model” of international speculators.
  Soros, who was born in 1930, is 93 years old. He is a late-blooming financier who became famous when he “shorted the British pound” in 1992, which earned him more than $1 billion in profits. Only by sorting out his process of shorting the pound can we understand why the “Soros model” may no longer be effective.
  In the early 1990s, there was no euro in Europe, and it had to wait until 10 years later, in 2002, for the euro to officially enter circulation. After World War II, as the economy recovered, European countries have always hoped to fix the exchange rates between their currencies in order to promote internal trade.
  The biggest advantage of a fixed exchange rate is that it allows the country’s importers and exporters to avoid risks caused by exchange rate changes. Although Europe is economically developed, it is a market composed of medium powers and small countries, each of which has its own independent sovereign currency. As a result of the numerous currencies, traders in various countries will suffer misery when encountering exchange rate fluctuations.
  So in 1979, Europe established the European Exchange Rate Mechanism, which stipulated that the currencies of various countries implement an exchange rate system that is close to a fixed exchange rate, that is, the currency exchange rates of various countries are kept to fluctuate within a fixed range and cannot exceed this range. If there is pressure in the foreign exchange market and the exchange rate may break out of this range, then the country’s central bank must take measures to bring the exchange rate back up.
  When the European Exchange Rate Mechanism was established, Germany had already recovered from the post-war period and was Europe’s largest economy and largest exporter. Therefore, various European sovereign currencies actually fluctuate around the Federal Deutsche Mark. The exchange rate fluctuation range of each sovereign currency against the Deutsche Mark is determined to be within a range of up to 6%.
  Continental European countries are very active in joining this mechanism, but the British and continental Europeans are always very different. They are always waiting to see changes in the European continent, and they also have a strong sense of pride in the strength of the pound. Therefore, it was not until 1990 that the UK announced its membership of the European Exchange Rate Mechanism. Of course, their determination to defend this mechanism is not firm. Soros saw this.
  1992 was a special time. It had been almost two years since the reunification of East and West Germany. In order to unify Germany and provide transfer payments to the relatively backward East German region, Germany’s monetary policy continued to be loose. As a result, the inflation rate in post-unification Germany became very high. Then, in order to combat inflation, the German central bank began to raise interest rates. Essentially, raising interest rates means the price of the currency increases, so the German mark appreciates against the pound.
  At this time, Soros saw the opportunity and began to sell pounds in the foreign exchange market and buy German marks. Once the pound depreciates and the mark appreciates, he can earn the difference. But the risks are also obvious. If the pound stops depreciating, or even prices rise, and the mark stops appreciating, then he will lose money and lose blood.
At this time, Soros was 62 years old and had experienced all major storms. He was more familiar with international politics and “human nature” in the international financial market, and knew that the European exchange rate mechanism could not be sustained among specific countries.

  At this time, Soros was 62 years old and had experienced all major storms. He was more familiar with international politics and “human nature” in the international financial market, and knew that the European exchange rate mechanism could not be sustained among specific countries.
  In fact, in this case, if it wants to maintain the exchange rate with the German mark, the Bank of England should not only raise interest rates, but also sell the German mark and buy pounds in the foreign exchange market, thus affecting the exchange rate in a two-pronged manner. At the same time, Germany should first stop raising interest rates and lower interest rates so that the pound-to-mark exchange rate returns to its original range.
  But the result is that the UK did raise interest rates, but to little effect. Moreover, Britain’s foreign exchange reserves are not enough to support this battle. In the end, the Bank of England exhausted its reserves and still failed to stop the pound’s decline. In addition, the UK is also questioning whether it makes sense to continue to defend the exchange rate mechanism created by the Germans and the French, and what benefits it will have to the UK.
  Germany has also rejected outright requests to lower interest rates. At this time, people in Germany were already complaining about inflation, and some Germans in the west were complaining about the country’s transfer payments to the east. Therefore, if inflation is not resolved, this will be a serious “political problem.” German politicians and central bank managers are under great pressure and can only bite the bullet and not cut interest rates, instead of considering whether the European Exchange Rate Mechanism can retain the UK.
  As a result, the pound continued to fall, and the UK finally announced its withdrawal from the exchange rate mechanism. Soros returned with a full load and became famous in one battle.
  However, the “Soros model” that worked 30 years ago may not necessarily work now.
The balance of power is changing

  Today’s international financial markets and foreign exchange markets are no longer what they were back then. The premise that Soros can “defeat” the central bank of a country, especially an industrial power, no longer exists.

  The reason why Soros can “defeat” the Bank of England lies in two points. First, the Bank of England’s foreign exchange reserves are insufficient. In response to the depreciation of the pound against the mark, the foreign exchange it can use is relatively limited. Since the beginning of the 20th century, Britain has no longer been an export power, but has transformed into a financial and technological power. The economy is not a model conducive to exporting and earning foreign exchange. It is not surprising that there are not many foreign exchange reserves.
  Insufficient foreign exchange reserves are a natural “weakness” that will quickly make the central bank run out of “bullets” in the process of maintaining the local currency exchange rate. At the same time, since foreign exchange reserves are inherently scarce, using them too much will also create certain political pressure in the country. Moreover, if foreign reserves are exhausted, it will also affect the normal trade settlement of importers and exporters. Therefore, in the end, the Bank of England simply cannot play a long-term game.
  Another reason is that there was serious information asymmetry in the international financial market at that time. Soros and the international financial speculators behind him happened to have an information advantage, while central banks such as the Bank of England had an information disadvantage.
  In the 1990s, hedge funds were still a brand-new concept, and there had never been a similar exchange rate battle in the international financial market. At this time, the central banks of many countries and economies will regularly announce the foreign exchange reserves they hold. International financial speculators can clearly see the “bullets” of others, but the central bank does not know how much funds the international financial speculators can mobilize and how much they hold. position. Soros’s success lies largely in the fact that “I am in the dark and the enemy is in the open.”

In June 2023, Soros handed over his financial empire to his 37-year-old son Alex Soros

  Today, both conditions have been broken down. The foreign exchange reserves of industrialized countries often amount to hundreds of billions or even trillions of dollars. They have sufficient “bullets” and are not afraid of any international speculators at all.
  In 1997, Soros transplanted his experience of “defeating” the Bank of England to Thailand and began shorting the Thai baht. Soros’s approach was exactly the same as before, and he was also “betting” on the depreciation of the Thai baht against the US dollar. In the end, Thailand gave up defending its fixed exchange rate and switched to a managed floating exchange rate system. Afterwards, the Thai baht plummeted, which became the beginning of the financial crisis in Southeast Asia. The reason why Thailand failed to succeed was not only due to insufficient foreign exchange reserves, but also due to domestic political constraints, which led to its insufficient determination and ability to defend its exchange rate.
  At about the same time, Soros took advantage of the trend of shorting Southeast Asian currencies and planned to short the Hong Kong dollar, but failed. Because, with the firm support of the central government, Hong Kong’s monetary authorities have very strong foreign exchange reserves and are very determined to defeat international speculators. Therefore, Soros finally gave up shorting the Hong Kong dollar. In 1997, Hong Kong’s foreign exchange reserves alone reached US$92.8 billion. If the number of foreign reserves that the mainland can support is included, the scale of “bullets” is even more impressive.
In addition to more abundant foreign reserves of various central banks, the development of information technology and the increase of players in the international financial market have also made the information advantage of international speculators begin to weaken. More often, central banks have become the party with information advantages.

  Now, compared with the 1990s, the foreign exchange reserves of various countries have reached a new order of magnitude. Needless to say, super industrial countries like China, even emerging industrial countries like Thailand, have foreign exchange reserves reaching 195.5 billion US dollars in 2022. Compared with the Asian financial crisis, they are no longer the same dimension. Other Southeast Asian countries, such as Malaysia, Indonesia and Vietnam, also have foreign exchange reserves of more than 100 billion US dollars and are still growing. To deal with international gold speculators, our “bullets” are basically enough.
  In addition to more abundant foreign reserves of various central banks, the development of information technology and the increase of players in the international financial market have also made the information advantage of international speculators begin to weaken. More often, central banks have become the party with information advantages. The deepening cooperation mechanism between central banks of various countries has enabled them to have more and more comprehensive insights into and mastery of international financial market information.
  Smart Soros obviously knows that times have changed. In fact, since the beginning of the new century, Soros’s funds have also begun to engage in value investing. He has invested in Google and Tesla and made a fortune. He passed the throne to his younger fourth son, rather than his other sons who were close to 60 years old, partly because he recognized that times had changed.
  Soros’s former opponents, the monetary authorities of countries and economies, are becoming increasingly powerful. The financial market needs more methods from the new generation of financiers. The profit model that targets sovereign currencies for short selling may no longer be popular in many places.
  For large countries, whether it is onshore or offshore markets, the ability of monetary authorities to maintain the strength of their sovereign currencies is extraordinary. For example, on August 22, the People’s Bank of China issued a tender for the issuance of 35 billion yuan of central bank bills in Hong Kong, setting a new high in three years. Since then, the People’s Bank of China announced that it will issue 15 billion yuan of central bank bills in Hong Kong on September 19. Issuing central bank bills is equivalent to recycling RMB and reducing the supply of RMB, thereby achieving the purpose of increasing the RMB exchange rate. Such a large-scale operation fully demonstrates our determination and ability to maintain market stability and defend the value of the RMB currency.
  As of the end of August 2023, my country’s foreign exchange reserves were US$3.16 trillion, ranking first in the world. Any international financial speculator must know how to retreat when faced with a strong RMB.

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