Tag Archives: yuan

Can George Soros Control China?

George Soros. image from wikipedia

A handful of mainly U.S.-based macro hedge funds have led bets against China’s yuan since late last year (2015) and the coming weeks should tell how right they are in predicting a devaluation of between 20 and 50 percent. Texas-based Corriente Partners… [bets against the yuan].The firm reckons rush by domestic savers and businesses to withdraw money from China will prove too strong for authorities to resist and control, even with $3.3 trillion in FX reserves, the biggest ever accumulated.  London-based Omni Macro Fund has been betting against the yuan since the start of 2014. Several London-based traders said U.S. funds, including the $4.6 billion Moore Capital Macro Fund, have also swung behind the move.  Data from Citi, meanwhile, shows leveraged funds have taken money off the table since offshore rates hit 6.76 yuan per dollar three weeks ago…

That has prompted comparisons with the victories of George Soros-led funds over European governments in the early 1990s. Chinese state media on Tuesday warned Soros and other “vicious” speculators against betting on yuan falls.

“China has an opportunity now to allow a very sharp devaluation. The wise move would be to do it quickly,” Corriente chief Mark Hart said on Real Vision TV this month.”If they wait to see if things change, they will be doing it increasingly from a position of weakness. That’s how you invite the speculators. Every month that they hemorrhage cash, people look at it and say, ‘well now if they weren’t able to defend the currency last month, now they’re even weaker’.”

“It’s a popular trade. I can’t imagine a single western hedge fund has got short dollar-(yuan),” Omni’s Chris Morrison said.Derivatives traders say large bets have been placed in the options market on the yuan reaching 8.0 per dollar and data shows a raft of strikes between 7.20 and 7.60. The big division is over pace and scale.  Corriente and Omni both say if China continues to resist, it may be forced this year into a large one-off devaluation as reserves dwindle….

China’s response to yuan pressure has underlined a difference with earlier currency crises: Beijing has an offshore market separate from “onshore” China into which it can pump up interest rates at minimal harm to the mainland economy.  Earlier this month, it raised offshore interest rates, making it prohibitively expensive for funds to leverage overnight positions against the yuan. That sent many reaching for China proxies, including for the first time in years, the Hong Kong dollar.“We have a direct position in the (yuan) but it’s much easier to trade second-round effects of China,” said Mark Farrington, portfolio manager with Macro Currency Group in London. “The Korean won, Malaysia, Taiwan, are all easier plays.” … [Hedge funds] say Beijing may have spent another $200 billion of its reserves in January 2015; at that rate, most of its war chest would evaporate this year and the yuan weaken by a further 18-20 percent. Omni’s Morrison states “That is a fundamental misconception [to believe that Chinese authorities control the yuan]. They’re not making the tide, they’re just desperately holding it back.”

Excerpts from PATRICK GRAHAM, Hedge funds betting against China eye ‘Soros moment, Reuters, Jan. 26, 2016

What’s in a Currency: dollar v. yuan

dollar yuan

China’s new pledge to depeg its currency from the U.S. dollar underscores a difficult fact for Beijing: the U.S. Federal Reserve could blunt its efforts to rekindle Chinese growth.The Fed is widely expected to raise rates this week amid signs of a strengthening U.S. economy. Meanwhile, China’s economy is going the other direction, with Beijing cutting interest rates and making other moves to loosen monetary policy and spur slowing economic growth.

A U.S. rate increase could hinder that effort. It would likely make the dollar stronger, forcing China to intervene in currency markets to maintain the peg. That means buying yuan, often from Chinese banks, which effectively takes money out of China’s financial system at a time when Beijing is trying to make more available to its businesses and consumers.Already, credit remains tight for many Chinese borrowers, especially small and private companies, despite six interest-rate cuts and looser bank-reserve requirements enacted over the past 13 months.

On December 11, 2015, China’s central bank signaled its hope to break up that dynamic by pegging the yuan to a basket of currencies — including the dollar, euro, yen and 10 other currencies — instead of the U.S. dollar alone. That would give the yuan room to fall against the dollar…

But the move has also set off selling of the yuan both within China and in what is known as Hong Kong’s offshore market amid investor expectations that a currency basket means a weaker yuan…In a bid to calm the jittery markets, the PBOC said in an editorial posted on its website on December 14, 2015  that China’s still-high growth rate, ample foreign-exchange reserves and rising foreign demand for Chinese assets should work together to keep the Chinese currency at a reasonable equilibrium.

It is far from clear that China will depeg its currency from the dollar — something it has said it would do in the past only to retreat. Decoupling risks a loss of investor confidence in the yuan’s stability, which could lead to more money leaving China, according to Chinese officials and advisers to the central bank.

“Abandoning the peg would be an important step toward achieving monetary-policy independence, but destabilizing capital outflows could hold the central bank back from doing that,” one of the advisers said.  In early 2009, four years after it said it would divorce the yuan from the dollar, China hitched the value of its currency to the greenback again to keep the yuan from falling in the midst of the global financial crisis.

The peg has “complicated domestic macroeconomic policy management as economic prospects between the U.S. and China have diverged,” said Eswar Prasad, a Cornell University professor and former China head of the International Monetary Fund.

Some economists blame the yuan’s strength for some of the problems. They say an overvalued yuan relative to its purchasing power has led Chinese companies to cut prices and lower wages to stay competitive. Also, China’s exports to countries like Japan and those in Europe in recent months have declined faster than its sales to the U.S.”The overvaluation of the renminbi is a root cause of China’s economic ills these days,” said chief economist Lu Zhengwei at Industrial Bank Co., a large national bank in China.

Excerpts from China’s Pledge to Divorce Yuan From Dollar Faces Fed Test,  Dow Jones Business News, Dec. 14, 2015

 

China/Russia Chipping Away Dollar Status as Reserve Currency?

Russia's President Putin and China's President Xi Jinping attend a signing ceremony in Shanghai,  May 2014

VTB Bank and Bank of China signed on May 20, 2014 an Agreement on Cooperation in the presence of Russian President Vladimir Putin and Chinese President Xi Jinping.  The agreement was signed by First Deputy President and Chairman of VTB Bank Management Board Vasily Titov and Bank of China President Chen Siqing.

Under the agreement, the banks plan to develop their partnership in a number of areas, including cooperation on ruble and renminbi settlements, investment banking, inter-bank lending, trade finance and capital-markets transactions.  Vasily Titov said :”The signing of the agreement underscores VTB Group’s ongoing drive to grow its business in Asia, and will help facilitate the development of bilateral trade and economic relations between Russia and China, which have always been reliable partners.”

VTB Bank signs cooperation agreement with Bank of China, Press Release VTB Bank, May, 2014

Why Chinese Banks Love the United Kingdom

Yuan. Image from wikipedia

Britain’s banks, heirs to empire, have long coveted the riches of China. On October 15, 2013 their hopes of reaping them rose greatly when the chancellor of the exchequer, George Osborne, announced a deal with China that is intended to make Britain the main offshore hub for trading in China’s currency and bonds and for foreign institutions investing in China’s fast-growing economy.But there was a price. Mr Osborne conceded that British regulators would “consider” (which tends to mean “approve”) applications from Chinese banks wanting to enter Britain as branches of their parent banks rather than as subsidiaries. The difference may seem arcane but in the world of banking regulation it is hugely important. Branches are overseen by their parents’ bank supervisors at home. They are not required to have thick cushions of capital to absorb losses or large chunks of cash to see them through hard times. Instead they are expected to call on their parents for help if they run into difficulties. This makes branches much cheaper and more attractive for banks than subsidiaries.

It also explains why regulators generally dislike them. The laxer rules on branches leave them more vulnerable if they or their parent banks get into difficulties. In allowing Chinese banks to use branches, British authorities are in effect betting that if anything goes wrong the Chinese government will bail them out, says Simon Gleeson of Clifford Chance, a law firm.

The chancellor’s decision has raised eyebrows in London’s financial district. Some worry that a supposedly independent regulator has been subjected to political interference and has been forced to lower its standards. Yet critics of the deal overlook two important points. The first is that there is an inevitable tension between a bank regulator’s mission of maintaining financial stability and the wider aim of promoting economic growth. Tension between a regulator and elected officials is not just inevitable but healthy.

Just as important is the tricky balance regulators must find between protecting their own banking systems and encouraging the smooth functioning of global capital markets. Letting banks use branches allows capital to flow more easily around the world. Forcing them into subsidiaries can lead to the creation of stagnant pools of cash and capital.  Although Britain has cast a more sceptical eye over branches of foreign banks since the crisis—particularly after its taxpayers were left out of pocket by the collapse of Icelandic banks and their British branches—it has generally stood on the side of financial globalisation. In this it is increasingly lonely. American regulators are likely soon to force foreign banks to establish fully-capitalised units. EU officials are threatening to do the same. Given this trend, Britain’s stance looks less like an opportunistic grab for Chinese business and more like a last, probably hopeless, stab at keeping alive the dream of a seamless global financial market.

Chinese banks: Open for business, Economist, Oct. 19, 2013, at 62