A slew of Western investors and traders who placed bets in the past two years that the yuan would drop because of a weaker Chinese economy, the threat of a debt crisis and capital outflows have abandoned those positions in past months.
They have decided that — at least in the short term — they might well be on a loser if they try to fight the People’s Bank of China (PBOC), which has been taking a series of measures that appear aimed at keeping the currency stable.
This is particularly the case ahead of the 19th National Congress of the Chinese Communist Party, that is expected to allow Chinese President Xi Jinping (習近平) to consolidate his power. Also, the Chinese economy has been more robust than expected, the nation’s authorities have taken stiff measures to reduce capital outflows and the US dollar has been retreating from gains it made last year.
Major global fund managers — such as Goldman Sachs Asset Management, Old Mutual Global Investors, Standard Life Investments and Aviva Investors — have taken off short yuan positions even as many of them see some weakness further down the road.
The central bank has made some moves to defend the yuan. It has pushed up the cost of short-selling the currency and even changing the way it sets a daily mid-point used as a benchmark.
“They are not happy with a really weaker [yuan],” Old Mutual Global Investors London-based global bonds chief Mark Nash said. “People obviously don’t want to fight the central bank.”
Nash, whose firm manages US$44.7 billion globally, said he was short on the yuan at the beginning of the year, but took that position off shortly afterward.
However, he said he believes the strength in the yuan is reflective more of “an exercise in financial regulation” rather than an improvement in China’s economic outlook and hopes to go short again soon.
Standard Life Investments’ Hong Kong-based emerging markets fixed income fund manager Mark Baker said he gave up his short yuan position in the first quarter after seeing the success China was having with capital controls and some improvement in economic data.
“There is a desire to rein in expectations that the currency is merely a one-way bet,” he said.
The central bank did not respond to a request for comment.
The yuan has risen 2 percent against the US dollar so far this year.
In its latest policy tweak, the central bank has included a “counter-cyclical factor” in its method for fixing the daily mid-point around which the currency is allowed to trade.
The adjustment to the fixing method in might was the second this year and came after a string of capital control moves, all aimed at stopping domestic Chinese investors from moving cash abroad.
That has put a floor under a currency which fell 6.5 percent last year and 4.5 percent in 2015. Concern about the decline led the central bank to spend US$1 billion over two-and-a-half years to defend the yuan.
Short yuan positions are expensive. It costs about 5 percent annually to own and short the yuan directly based on short-term borrowing costs, although there are a variety of ways in which an investor or trader can structure a short bet.
Some investors interviewed for this article said they mainly use offshore forward currency contracts — settled for cash at a particular date — which makes the trade somewhat cheaper.
Beijing is also keen on keeping the yuan strong so that US President Donald Trump is not given any reason to take tough trade measures against China. During the election campaign, Trump had accused Beijing of manipulating its currency to make Chinese exports more competitive, hurting US companies.
The stronger yuan also helps to dissuade Chinese companies and citizens from moving money offshore.
Goldman Sachs Asset Management fixed income alternatives chief Jonathan Xiong said he closed out his short yuan positions at the beginning of the year as China’s growth prospects improved.
Stuart Ritson, head of Asian rates and foreign exchange at Aviva Investors, with about US$453 billion under management, removed his short position around the end of the first quarter and is now positive on the yuan owing to the central bank’s preference for a stronger currency, reduced capital outflows and because the yuan offers one of the best yields relative to volatility among emerging market currencies.
Ritson said he has not taken a bullish bet as of yet.
However, not everyone has left the trade.
Kyle Bass, founder of Dallas-based hedge fund Hayman Capital Management, said he has kept his short position because he believes the nation’s credit bubble problems are “metastasizing.”
Bass has long argued that the yuan is set to fall 30 percent against the US dollar.
“The numbers are telling me that we are right. The numbers are getting so bad so quickly,” he said.
However, even those who see the currency weakening have pulled back their forecasts.
Deutsche Bank’s chief China economist Zhiwei Zhang (張智威) said he sees the yuan ending the year at 7.1 per US dollar, rather than the 7.4 he was forecasting at the beginning of the year.
There should be some weakness because economic growth is likely to slow, capital controls could become less effective over time and the US dollar might not continue depreciating, he said.
At the other end of the spectrum are fund managers such as Ashmore Group’s London-based head of research Jan Dehn, who said he believes the market should not be blindsided by conspiracy theories.
“The recent stabilization of the yuan has perfectly sound foundations and can be explained without having to resort to some suspect or obscure schemes on the part of Chinese policymakers,” Dehn said.
Additional reporting by Jennifer Ablan and Kevin Yao
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