Someone Is Betting That The Chinese Currency Collapses By The End Of 2014?

Tyler Durden's picture

Last week, USDCNY began to accelerate lower and break across the "real pain" threshold that we have been discussing for many of the world's so-called "hedgers" who have been riding the one-way strengthening trend of the CNY for years and piled in with leveraged trades on what had been a one-way bet. The collapse this week, to levels not seen since pre-BoJ QQE and pre-Fed QE3 appeared to trigger an avalanche of unwinds or hedges of the exposures we have been worrying about. As the chart below shows, billions of dollars of upside calls on USDCNY were purchased on Friday with serious size out to 6.65 strikes (levels not seen since 2009) by the end of 2014.


The losses are mounting, as we explained in great detail here...

Simply put, if the CNY keeps going (whether by PBOC hand or a break of the virtuous cycle above), then things get ugly fast...

How Much Is at Stake?
In their previous note, MS estimated that US$350 billion of TRF have been sold since the beginning of 2013. When we dig deeper, we think it is reasonable to assume that most of what was sold in 2013 has been knocked out (at the lower knock-outs), given the price action seen in 2013.

Given that, and given what business we’ve done in 2014 calendar year to date, we think a reasonable estimate is that US$150 billion of product remains.

Taking that as a base case, we can then estimate the size of potential losses to holders of these products if USD/CNH keeps trading higher.


In round numbers, we estimate that for every 0.1 move in USD/CNH above the average EKI (which we have assumed here is 6.20), corporates will lose US$200 million a month. The real pain comes if USD/CNH stays above this level, as these losses will accrue every month until the contract expires. Given contracts are 24 months in tenor, this implies around US$4.8 billion in total losses for every 0.1 above the average EKI.


And clearly the hedging of those losses is underway en masse... (the size of the circles is the notinal being hedged - we have highlighted a few for context) as it is clear, hedgers are concerned that CNY would weaken to 6.65 or beyond by the end of the year

(h/t @moved_average )


The escalation of the unwind in recent days suggests the vicious circle is beginning.

Finally, putting aside speculative trader P&L losses, many of which are said to be of Japanese origin and thus will hardly enjoy much or any PBOC sympathies, here is CLSA's Russel Napier on what the long-tern fate of the Renminbi will be:

“Mercantilist alchemy transmutes China’s external surpluses into foreign exchange reserves and renminbi. But with capital outflows from China at record highs, those surpluses are only maintained due to its citizens’ foreign-currency borrowing. Bank-reserve and M2 growth are already near historical lows and are driving tighter monetary policy. This will lead to severe credit-quality issues and force the authorities to accept a credit crunch or opt for a major devaluation of the renminbi. They will do the latter; and despite five years of QE, the world will get deflation anyway.”

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Yen Cross's picture

 Wi Fuk Up.   Tu fuk yu/

aVileRat's picture

Yup, good catch. Few have been moving the Japan trade to the China trade in the last 3 weeks. Not like you can hide slugs/shorts this big and it's not like the players have been quiet on the "short china" trade since Jan-14. The Russia and Chinese party rooms at 2014 Davos are going to be sober as an Orthodox church on easter.

PBOC is the new Argentina (and Argentina is still a pile of crap), they are either going to need to do a stupidly large currency devaluation and subsequent "1-time charge" on the discrepancy between regional and national current accounts / tax fraud...... or the inflation is going to eat them alive before 2016. If you look at guys like Foxcon and Greely, the writing is pretty clear on the wall that the pump & dump export 5-year plans are stalling out. What comes next will likely force large contractors like Seimens or GE to review the solvency of their own contracts (and bribery laws) for some of these municipal 10+ billion projects. That corporate reckoning with many OEM manf. towns and banks I suspect will make the Asian Flu look like a cocaine buzz. 

If PBOC refuses to raise the rates and enter a "acclerated soft landing" I suspect credit fraud will grow exponentially given the increasing scarcity of non-metal collateral plus high leverage rates in the OEM manf. sector. The secondary effect is if they do raise the rates, then the blowback on muni-trusts and other retail ponzi schemes will force the Army on the people, which will permantly end the whole "peoples army" chirade that props up the Politburo in the eyes of many Han low-party members.

What makes this all amusing is at the same time China and most BRICS are suffering horrible corruption, downgrades in domestic earnings and a 10 to 25% decline in BRIC middle class growth/consumer discretionary demand, we see all the talking heads in London,Toronto,NewYork,Paris trying to pump EEM's to retail flow. It's like everyone is trying to forget 1998, or get off their 1998-like India/China positions.



post turtle saver's picture

an excellent analysis, well done +1

Pinto Currency's picture


I suspect that China has an exit strategy outside of the conventional framework of the current financial system.

Their announced intention to trade gold and oil in Yuan, the numerous empty cities that have been built, their BRIC allignment, stockpiling of raw materials and gold, ...

They may just cut the mooring lines with the Western financial system when the Russia situation goes hot and accept a decade of social disruption as a cost preferable to Western domination.

TruthInSunshine's picture

China has basically come out & openly stated they're going
to massively devalue the CNY (as I've been stating is necessary given their export-INTENSE economy) relative to developed nation currencies, and there's not a damned thing that will be done to stop them from doing so given that a) trying to stop them from doing so will impede their ability to clear their massive toxic debts that their banking system is sitting upon, b) trying to stop them from doing so will merely accelerate and deepen the now renewed global'economic crisis, in no small measure to crises in emerging markets (and a very weak BRIC wall), c) doing so will most assuredly guarantee a nasty, protracted trade war, with many reciprocate tariffs & import sanctions (see D as to why this will not be welcomed by western firms), and D) Western firms have now built out TRILLIONS in plant/factory & R&D investments, now captive holdings planted on Chinese soil, with 50 year growth plans largely dependent on sales in China and exports of Chinese manufactured components/goods to the rest of the globe (so, they're likely to lobby for gentle treatment of China).

I will not be shocked to see the CNY pegged at 8 or even 10 to 1 USD within 18 months, and to be honest, 12 to 1 is not a ridiculous target position for a 24 to 36 month time frame. That would be a currency devaluation against the USD (and Euro, most likely) of 50%.

Joenobody12's picture

10 to 1 USD ? Is it todays USD or the USD in 36 months ? Have you figure out what the projected US national debt interest payment versus GDP is in 36 months ? 

sessinpo's picture

 Joenobody12          10 to 1 USD ? Is it todays USD or the USD in 36 months ? Have you figure out what the projected US national debt interest payment versus GDP is in 36 months ?


You are only looking at one side of the equation. How about the projected situation in China in 36 months?

Joenobody12's picture

Who can predict what is going to happen in 12 months , never mind 36. However, devaluing the RMB will have a positive effect on its trade balance whereas the accumulation of more debt will be negative for the US. Given past history, it is unlikely there will be any change in the trend of debt accumulation in the US. Also, dont forget there are over a billion poor Chinese so there are lots of room for the expansion of the Chinese economy (internal consummer consumption). Not so much in the US although here infrastructure can use an infusion of $$. 

Oracle 911's picture

I suspect they will sink the US$.

Rumination's picture

Some of this is over my head, but googling some of the terms, I can understand exactly what you're saying. I know we're not all journalists here, but please do a little proofing, guys. "Greely" shoud be "Geely." You have significant contributions to this blog, but credibility wanes with mistakes. Journalists understand this, and always make sure their punctuation, spelling and grammar are correct.

Wahooo's picture

Journalists might get the spelling right, but they get the story wrong.

monkeyboy's picture

So thats *WHY* they be buying all that gold...the yuan drops...

TheSecondLaw's picture

most BRICS are suffering horrible corruption, downgrades in domestic earnings and a 10 to 25% decline in BRIC middle class growth/consumer discretionary demand

I live in a BRICS country and can confirm the sorry truth of this statement.  Inflation is also way higher than the "official" numbers.

post turtle saver's picture

The 1998 Russian finance crisis was triggered in part by the 1997 Asian finance crisis. The '97 Asian finance crisis resulted in decreased demand in two very important areas: crude oil (petro products) and non-ferrous metals (e.g. copper and other metallic commodities). This had an impact on Russian foreign reserves as these were (and continue to be) the two most valuable sources of Russia's capital inflows. Hence the happenings in '98 and my prediction that, unless things change soon in dramatic fashion, we'll see the same in 2015.

History doesn't repeat, but it does rhyme. This is why I've been paying strong attention to what's currently happening in China, and I'm glad to see ZH focusing on this very real concern.

What are the fixes? Pick your poison as the article states... credit crunch (which is certain death) or devaluation (which is slow death by a thousand cuts, but at least you buy time). Devaluation, deflation, and dropped demand are death for commodity economies. This doesn't bode well for any of us but some will be better set for what comes than others. Expect the phrase "flight to treasuries" to be on everyone's lips in the coming months.

JLee2027's picture

But I  thought the Yuan was going to take over the world?

Oracle 911's picture

Like I said, they will sink the US$.

sessinpo's picture

Oracle 911         Like I said, they will sink the US$.



It would be the US Government that would sink the US $

Oracle 911's picture

I disagree, at least partially. Because rest of the world need move away from US$. And it would be a reaction on a really stupid move of US gov (sadly the stupidity is limitless).

Jumbotron's picture

This dovetails very nicely with Eric Janzen's article from the first of the year, detailing his forecast for the rest of 2014 and beyond.  He sees a big recession beginning this year and particularly going into 2015 and beyond.  He has nailed the last 3 bubbles and 2 recessions years in advance.  Not saying he is a prophet or has this scenario right.....but.....

Quus Ant's picture

Who's wearing the dirtiest shirt now, bitches?  Smell test.  Canada, you're next.

Aknownymouse's picture

What r u saying? Canadian looney is backed by tons of gold, oil and agri products. This is the most solid of all. Get some.

Quus Ant's picture

Gold, oil, AND agri?  Then US troops are probably already on the ground.  Any country gets to uppity- helloooo Canadian middle class- and they can expect an audit. 

There can be only one.

Bindar Dundat's picture

Like I said before: Canada and the U.S. share a common problem-- we both have lazy bums on our immediate and unguarded southern border....ah?

The last time you messed with us we burnt down Washington and the WH  :-) Ah?

Quus Ant's picture

Hey, I didn't mess with you and you didn't mess with me.  but the government that runs my open air prison will ensure the government that runs your open air prison will never be more than a slavish understudy.

Mad Muppet's picture

Like I said before: Canada and the U.S. share a common problem-- we both have lazy bums on our immediate and unguarded southern border....ah?

The last time you messed with us we burnt down Washington and the WH  :-) Ah?



Just speaking for myself, now would be a very good time to do it again.

litemine's picture

The Canadian Government holds No Gold. A requirement if we wanted to Trade. The  Rule Book was  wrote by the IMF./

prains's picture

Yes, all of Canada's gold still resides in the ground


but some would have you believe that it lives in Toronto, don't believe them

emersonreturn's picture

QA, canada's a colony, always has been, it's very comfortable as a colony, it wouldn't dream of becoming uppity.  the brits taught it how to cue and stay polite.  the free trade agreement is firmly in place, water oil and whatsoever else the master needs.  

km4's picture

OT but good 

Russia opening gov’t-backed startup accelerator in Crimea via @VentureBeat

perhaps Putin talking to Obama hope and change ;-)

Latitude25's picture

Where's that deflation?  I need deflation NOW.

0b1knob's picture

Massive over supply and cancelled Chinese contracts in soybeans.

Coming soon:  Cancelled purchase contracts for coal, iron ore, oil, etc. etc etc.

The wheels are coming off the Chinese bus.

James_Cole's picture

Coming soon:  Cancelled purchase contracts for coal, iron ore, oil, etc. etc etc.

Coming soon? 
Amish Hacker's picture

We might be about to find out how many times those commodity warehouses full of "collateral" have been rehypothecated.

Bernoulli's picture

x10? x20? "FlowTex-Style"

Makes me crack up over and over again... the "brain" behind it used to be a used car and scrap dealer... he he...

In contrast, today in China they probably didn't even move around the collateral, they probably just showed the same shit to everybody without blushing (if anybody came at all to "audit").


post turtle saver's picture

uh oh... you delivered before receiving letters-of-credit? bend over, me love you looooong time

Flagit's picture


The wheels are coming off the Chinese bus.

yup, they...wait, were you making a joke?

Yen Cross's picture

 No disrespect to PBoC. They've certainly been complicite in the central banster game.

 What is com·plic·it?

  (k?m-pl?s'?t) adj. Associated with or participating China's gross domestic ouput is failing.
China can't even maintain ^6% growth.  Look @ electrical{energy] output and shipping demand for honest a questionable act or a crime; having complicity: newspapers complicit with the propaganda arm of a dictatorship    In any case the PBoC has outspent the Fed. @ 3:1 ratio.   China's gross domestic ouput is failing. China can't even maintain ^6% growth.  Look @ electrical{energy] output and shipping demand for honest answers.
Robot Traders Mom's picture

This would send a good chunk of change into Tsy's and allow the Fed to unload some of their balance sheet...makes sense.

km4's picture

OT but good

Angela Merkel preaches pro-growth reforms to her neighbours but implements anti-growth ones in Germany

TPTB_r_TBTF's picture

More growth in Germany would attract undesirables to come to Germany looking for work.


Maybe she knows what she is doing?


Germany's neighbors should keep their undesirables and find something for them to do.

Sudden Debt's picture

Well, a chinese economic crash would really mess up the global geopolitical situation for the worst.

At best, China would get a revolution by the working class and at worst they look for a black sheep and pickup fights allover Azia.

And what's next? Because being the least broke isn't exactly a good place for any other superpower.

Europe is broke... we know that.
America is broke... we know that.
Russia is broke... we know that.
China is broke... we know that.
Japan is broke... we know that.
And the parking spaces like Africa and south America... who cares.

So will we fight each other or become best friends?

That world currency really start to sound a bit les conspiracy right now...

Yen Cross's picture

SDR will NEVER happen SD.  Black markets and regional issues will see to that.

 Personally, I think things are going to "disintergrate" into regional conflict.  I hope that's the outcome.

   Civil War United States <2030> full blown.

wintermute's picture


Fill in the blanks for an answer to the next reserve currency conundrum.

TheRedScourge's picture

1) Can't tell if Bitcoin or Bullion (same amount of underscores)

2) Additionally can't tell if serious or trolling


Good job sir.

seek's picture

Three options: no civil war after a come-to-god moment at the federal level, Civil war 2.0 will be settled by 2030, or the US will look like Somolia.

My bet is #2, with the US segregating into a few largish mutli-state coalitions, probably with some token federal government that manages the remnants of the US nuclear arsenal and little else. The northeast and the rust belt are going to look like east Germany during the cold war, since that's where the people who made this fucking mess have their power base. California will be its own country for a little while (before it turns into Somolia 2.0, and I suspect AZ, NV, and OR will have some immigration policies in place that make the current ones look like open borders.)

I have no doubt regardless of any of those three outcomes that there's a massive shift in power towards Texas in the next 15 years. The fact that the CIA relocated to Colorado should scare the hell out of people on multiple levels.