One month ago, we first revealed that for one prominent winner from the subprime crisis, Hayman Capital’s Kyle Bass, “the greatest investment opportunity right now” is to short the Chinese Yuan: as he explained “given our views on credit contraction in Asia, and in China in particular, let’s say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there’s one thing that is going to happen: China is going to have to dramatically devalue its currency.” He even went so far as to give a timeframe: “we think it’s going to be in the next 12-18 months.”
Then, during the Davos boondoggle, none other than the man who broke the Bank of England, George Soros, noted that he too is shorting the Yuan, which in turn prompted China’s communist party mouthpiece, the People’s Daily to officially warn Soros to back off adding in a petulant, schoolyard bully-ish voice “You Cannot Possibly Succeed, Ha, Ha.” Yes, China really said that.
Then, just last week, in a sad letter in which Bill Ackman blamed everyone and everything for his pathetic performance in 2015, most notably hedge fund herding and hotels, which he was so eager to exploit on the way up with presentation-filled idea dinners, and so eager to blame for dumping his names on the way down, we found out that Ackman had also decided to put on a Yuan devaluation trade just days before the Yuan devaluation announcement (perhaps he read our post from August 8, which said that a devaluation is imminent 3 days before it was revealed):
“Last summer, we built large notional short positions in the Chinese yuan through the purchase of puts and put spreads in order to protect the portfolio in the event of unanticipated weakness in the Chinese economy…Two days after we began to build our position in the Chinese yuan, China did a 2% surprise devaluation which substantially increased the cost of the options we had intended to continue purchasing. We continued to build the position thereafter by buying slightly more out of the money puts and selling further out of the money puts so as to keep the cost and risk/reward ratio of the position attractive.”
Sadly, Ackman has still to make money on this trade.
But Bass, Soros and Ackman are not alone.
In fact, as the WSJ writes today, the who’s who of hedge funds appears to agree with our post from December 11, in which we said that “anyone who thought that the Yuan devaluation is over, now that the currency is at the lowest level relative to the dollar since 2011, the reality is that the devaluation relative to everyone else is only just starting.”
And, with the PBOC’s warning that the “RMB is relatively a strong currency among the major international currencies” the real devaluation is, just as we warned four months ago, about to be unleashed. Expect at least a 15% reduction in Trade-Weighted terms in the coming weeks and months, especially if the Fed hikes
Sure enough, just a few weeks later we were proven correct again when the PBOC unleashed a second, far more violent devaluation round, one which has cost the PBOC hundreds of billions in FX intervention costs and a desperate attempt to plug capital control holes as the domestic population desperately wants out sensing that its currency is losing its value by the minute.
So who are the brave souls who have decided to very openly fight the People’s Bank of China?
Here is a sample: Soros, Bass, Ackman, Druckenmiller, Tepper, Schreiber, Einhorn, Scogging, and Carlyle, Nexus and many more.
Some more details on just how massive these bets are:
Kyle Bass’s Hayman Capital Management has sold off the bulk of its investments in stocks, commodities and bonds so it can focus on shorting Asian currencies, including the yuan and the Hong Kong dollar.
It is the biggest concentrated wager that the Dallas-based firm has made since its profitable bet years ago against the U.S. housing market. About 85% of Hayman Capital’s portfolio is now invested in trades that are expected to pay off if the yuan and Hong Kong dollar depreciate over the next three years—a bet with billions of dollars on the line, including borrowed money.
Why is Kyle Bass practically all in? Simple: for him “‘this is much larger than the subprime crisis, said Mr. Bass, who believes the yuan could fall as much as 40% in that period.”
Then there are the legends: Billionaire trader Stanley Druckenmiller and hedge-fund manager David Tepper have staked out positions of their own against the currency, also known as the renminbi, according to people familiar with the matter. David Einhorn’s Greenlight Capital Inc. holds options on the yuan depreciating.
Mr. Druckenmiller, who now invests his own wealth, and one of his former protégés, Zach Schreiber, who runs the roughly $10 billion hedge-fund firm PointState Capital LP, also have had sizable shorts against the renminbi since last year, people familiar with the matter said.
The funds’ bets come at a time of enormous sensitivity for China’s leaders. The government is struggling on multiple fronts to manage a soft landing for the economy, deal with a heavily indebted banking system and navigate the transition to consumer-led growth.
Other firms that have profited from shorting China’s currency include the $2 billion Scoggin Capital Management and Carlyle Group LP’s Emerging Sovereign Group, according to people familiar with the matter.
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The situation grew more tense after billionaire investor George Soros predicted at the World Economic Forum gathering in Davos, Switzerland, recently that “a hard landing is practically unavoidable” for China’s economy. He said he is betting against commodity-producing countries and Asian currencies as a result.
Days later, a commentary appeared in China’s state-run Xinhua News Agency warning that “radical speculators” trying to short sell, or bet against, the Chinese currency would “suffer huge losses” as the Chinese monetary authority takes “effective measures to stabilize the value of the yuan.”
To be sure, the show of force has scared off some fund managers from adding to their wagers. Some traders have scaled back or even exited from their short bets, saying they have little appetite to go up against the Chinese government. However, since it is merely a matter of time and having a large enough balance sheet to withstand the whipsaws by the PBOC, many will simply double down, and perhaps not so much on the Yuan but on parallel currencies who central banks aren’t as paranoid: “some say they are looking with new interest at shorting the currencies of other Asian countries that they expect would fall if the yuan keeps depreciating.”
Finally, there is a saying “don’t fight the Fed,” Well, ironically, by devaluing the Yuan, China is doing precisely that: it is fighting the Fed’s aggressive attempts to push the USD ever higher with its obstinate push to hike rates even as the entire world slides into a global USD-denominated recession, by devaluing at appropriate intervals and shocking the global financial system. Perhaps all these “brave hedge fund warriors” are not so much fighting the PBOC as they are siding alongside the Fed, if only for the time being. However at this rate of credibility loss, between the US, China and most recently Japan, not to mention the ECB’s December debacle, pretty sure it won’t be fighting this or that central bank, but all of them at the same time.
As of this moment, however, all these hedge funds who have taken on the PBOC are winning, because after another massive intervention round on Friday, one which cost the PBOC more billions of dollars from its rapidly dwindling FX reserve pile, the CNH is already weaker tonight: will the PBOC burn through another $10 billion just to teach these hedge funds a lesson even as the market is implying far more pain for the PBOC?
Worst of all, since they are not physically located in China, the local authorities will find it just a little more difficult to physically arrest these “evil shorts” and “disappear” them for good.