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Why From China's Biggest Bear, Hugh Hendry Became One Of Its Biggest Bulls
Back in the day, Chinese stocks had no greater nemesis than Hugh Hendry, whose "China Short" fund soared by 52% in 2011. The (anti) investment thesis was simple: the Chinese economy is bogged down by unprecedented overcapacity. Well, it still is, but Hugh Hendry sensed which way the wind was blowing for the last central bank left to unleash QE, and some time ago, ahead of a gargantuan, liquidity and margin-debt driven Shanghai Composite rally, the Scotsman warned, so far presciently that "To Bet Against China Is To Best Against Central Bank Omnipotence."
Considering that Chinese equities are the best performing market in USD terms (second only, oddly enough, to Russia) in 2015, one can see why after a disappointing 2012 and 2013, and modest 2014, Hendry has hit 2015 out of the park with a bang, generating a 10.6% return in the first two months of the year.
So is Hendry still bullish on China's stock market prospects? Why yes, and then some. But is he is contrarian just for the sake of being contrarian? Does he see something in China that nobody else does? Or is he simply right... or wrong, as the case may be? We will let readers decide.
Here is his full "managers' commentary" from his most recent letter to investors dedicated entirely to China.
So much is written about China, and of late very little has been bullish. The notion of impending renminbi devaluation has taken root as traders worry that the dollar rally has pulled its reluctant Chinese counterpart higher, especially against the euro and the yen. Indeed, it seems that shorting the renminbi has become the new equivalent to the JGB short in macro circles. But having shared these doomsday prophecies back in 2010, when the consensus was less negative, I have recently become less concerned about China. Here’s why.
First China has recalibrated its growth model. Between 2001 and 2011, China had a very comparable decade to the US economy during the 1920s. Both boomed on surging productivity, high returns on capital, massive gross fixed capital formation and a fervent desire by the rest of the world to participate. We know that both economies should have boomed; indeed they did. However I would contend that they should have boomed even more.
That they didn’t was because of hawkish macro policy. In the 1920s, the Fed refused to allow the high powered money entering its economy via the gold standard to boost credit further. The Chinese discriminated against their household sector: the currency was never allowed to appreciate as much as the boom justified; wages never fully captured the dramatic gains in productivity; and real interest rates were consistently negative. Together, these measures robbed the household of anything between 5% and 7% of GDP per annum, statistically depressing income’s share of GDP and hence boosting involuntary saving. No one really complained, everyone felt better off, but they could have done even better.
However, with the rest of the world now languishing from insufficient demand, the policy is no longer practical and policy makers have acted consistently and repeatedly for the last two years to change this. The hand brake on Chinese household incomes has been lifted as the country pursues a different growth model. Clearly the currency is no longer deemed undervalued, and the surge in both the dollar and the renminbi has produced a tremendous redistribution in the global economy enriching US households and mainland Chinese consumers. Real and nominal interest rates are now high, and wages have been capturing more of the productivity bounty. Consumer spending is strong and probably underpins something like 4% GDP growth on its own. Why should policy makers undermine the one reliable motor of economic growth by choosing to devalue their currency? It just doesn’t add up.
Second, at the macro level not all countries are born equal. A select group of nations – the US, core European countries, Japan - belong to an elite ‘Tier One’ macro community. These countries have large non-tradable sectors and as demonstrated by the adoption of QE, have the firepower to determine interest rates without being constrained by the fear of inflation from a weakening currency. The appeal of China today rests on its graduation to this community. China is no Mexico, an oil exporting country feeling under pressure to raise interest rates in the face of a slowing economy and worsening terms of trade precisely because it fears the consequences of losing control of the peso. Rather, China seems to belong in the same camp as the US, Europe and Japan, the countries with the scope to determine their own monetary policy.
Nevertheless, economists have fretted as the renminbi has appreciated alongside the US dollar. The fear is that this will hit an already vulnerable domestic economy with a sharp reduction of the trade surplus. Valuing currencies is notoriously difficult as I tried to explain in my November report. Nevertheless I find it hard to demonstrate that the currency is substantially overvalued at a qualitative level. To start with, the trade surplus has gone on to reach a record nominal high. You may observe that this can be partly put down to a fall in the price of imports (of which more below), but China’s competitiveness in export markets seems to remain strong with its market share of global exports continuing to rise. Domestically, unemployment remains low in the major conurbations, and the GDP growth rate, whilst slowing and subject to the great bluster of its politically motivated national accounts methodology, still seems much healthier than elsewhere in the world.
Perhaps it is more useful to look at the terms of trade. It has certainly done a good job at explaining the differentiation of emerging market currency moves over the last 18 months. The huge decline in China’s raw material costs, especially the slump in both iron ore and oil, have massively improved the country’s standing and the trade weighted currency has appreciated in tandem; it may be as simple as that. The same can be said for India where only the central bank’s accumulation of foreign exchange reserves has prevented further appreciation. In contrast, the free-fall in the currencies of Russia and Brazil seems to match the devastation in their terms of trade as their important raw material exports have suffered from tremendous deflation with no meaningful offset in other inputs.
Of course, the real bugbear for those less disposed to China’s prospects concerns the management of its currency peg with the US dollar. The combination of a bearishly disposed international macro community and the desire of businesses operating within China to hedge their FX exposure has pushed the currency to the top of its regulated trading band. The upshot of this has been that the PBOC has had to intervene: buying renminbi and selling dollars. This of course drains the Chinese economy of liquidity as can be seen by rate movements. For instance, despite two rate cuts and a reserve ratio reduction, the seven-day repo has risen 140bps to 4.8%. The withdrawal of liquidity can also be seen in the 10% fall in Shanghai A shares from the start of year to mid-February. Perhaps the macro community is right to worry after all?
Not so fast. Remember China is the only ‘Tier One’ economy not trapped by the zero lower bound, domestic interest rates are high by international standards and China has ample scope to reduce rates further. Indeed the policy looseness announced since last November’s first cut has pushed stock prices higher and the one year forward repo rate trades at 3.6% which suggests that domestic investors perceive this to be a temporary tightness in liquidity which will ultimately be addressed by the authorities.
Several years ago when seeking to chronicle the likely sequencing of crisis as deflationary forces swept across the globe we proclaimed "US first China last”. This has stood the test of time. Deflationary shocks in each of those economies caused sharp sell-offs in local financial markets, and brought forth a policy response which proved extremely beneficial for investors in those countries. Today, the global deflationary surge has finally humbled the Chinese growth engine, transforming the community of macro investors into bears and the local stock market has fallen 75% from the 2007 peak. In fact, the risk/reward set up in Chinese equities seems akin to investing in US stocks back in 2009, Japan in late 2012 or Europe in late 2014. Like then, the market seems to be underestimating the power of central banks to reduce policy rates and the likely positive reaction of risk assets.
Of course standalone delta one equity plays don’t always sit easily in a macro portfolio; the risk-reward is rarely sufficient for a manager who wants to have his cake and eat it. Eclectica is no different. Whilst we are long the equity market we hedge a lot of this risk by paying offshore interest rates. This allows us to run a more diversified risk book as well as exploit some of the peculiarities of the prevailing financial system and capitalise on the ongoing macro bearishness. Granted the notion of paying rates into a slowing economy that has high nominal rates (by international standards) and that has just embarked on a policy of rate cuts is contradictory to our argument so far. Allow me to explain…
There are two prominent drivers. First, China is truly different. Its domestic financial system has been isolated from the rest of the world for many years and is riven by government intervention; it is almost unrecognisable to western eyes. Below the seeming order of the modern Chinese banking system lies a startling obfuscation of risk as well as a system of economic apartheid which rejects legitimate private sector credit demand from China’s household and SME sectors. Having shut out so much of the private sector from credit provision for so long it is not much of an exaggeration to suggest that there is a huge demand for liquidity at any price. Published rates simply do not reflect the much higher levels that many are willing to pay to access credit.
Fortunately the government’s attempt to open up the capital account has created a credit channel for this pent up demand. As the market liberalises and it becomes easier to bring liquidity onshore, the huge onshore market readily mops up the offshore liquidity pool, pushing offshore rates higher. Furthermore, the negative bias on China from asset managers and the renewed vigour of exporters to hedge their currency gains periodically leads to the currency trading cheaper offshore than onshore, creating an opportunity for arbitrage players to exchange their dollars for renminbi at a better rate. As the offshore currency is brought onshore, liquidity permanently leaves the international system and again pressures rates to rise further to the benefit of our paying position.
Think of our China trade as analogous to playing pinball. You get three balls and the objective is to maximise one’s score by having the balls strike different angles on the playing field. With the first ball, we are holding a long renminbi position via options. Above, I have argued that the currency is fairly valued. It is hard to rationalise that the authorities will seek to devalue in trade weighted terms. Indeed, when consideration is given for the extraordinary boost in the country’s terms of trade I am unsure that it even needs to lose ground versus the rapidly appreciating dollar. As we all know the macro community tends to have a short time span for blow-up trades and with the currency having come off the upper trading band in March, and the PBoC no longer intervening, trade size is probably being cut and the currency will likely return/appreciate to the middle of its band.
With the second ball we are long the stock market. The market having fallen 75% from its peak had discounted the bad news and indeed was increasingly pricing in the possibility of bankruptcy. However the shift in policy to favour the private sector has probably averted such a catastrophic outcome, and with further policy loosening to come the equity market is starting to value these businesses as ongoing concerns with modest price earnings multiples once more. Stocks have rallied 35% on two small rate cuts despite poor inter-bank liquidity and rising short-term rates. I am enthralled at what they may do if policy is genuinely loosened and the credit market truly thaws out. The persistent error of the macro community since 2009 has been to underestimate the ability of Tier One economies to loosen monetary policy to avert crisis. The same outcome seems plausible today in China and equities appear attractive.
And finally with our third ball we are paying short term rates in the offshore market, which acts as a bearish hedge as well as aligning us with an opening up of China’s convoluted capital account. The willingness of Chinese domestic borrowers to pay up for available credit when it is made available has been demonstrated by the more liberal offshore market where rates already trade above onshore levels. Further liberalisation is likely to push rates higher until demand is sated. Paying rates therefore seems sensible. And in the unlikely event that the situation deteriorates and inter-bank rates spike higher as the authorities fail to produce sufficient liquidity to the onshore market, our payers will provide a welcome hedge against our equity and FX positions.
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Hugh obviously had a stroke
https://www.youtube.com/watch?v=f6AmyRTBdXI
me and hendry have also reversed our position re: japan
because omnipotence
Hugh, Hugh, sniffing glue...
Hugh, my man, the fast money in China realized not long ago that the real estate thing had pretty much run it's course. So they moved into the stock market. All else is trivia when that kind of sea change takes place. It has little to do with "fundamentals" or "changes in government policy" towards cleaning up corruption.
Hugh's not sniffing glue
He's done better homework than some of the Tylers, that's what happens when your paygrade depends on it
Of course he's still just playing arbitrage opportunities, he's a hedgie, that's what he does.
But some of the points he makes, such as the real effect of RMB valuation on Chinese households, and pointing out the Chinese stock market had been down 75% from 2007 highs and was at historic lows before the recent surge, is quite salient.
The man even delved into the domestic financing landscape, gotta give the man kudos for diving into something that many other non-Chinese "outsiders" wouldn't even want to make an attempt at understanding.
Start working at home with Google ! Its by-far the best mixed bag of goods I've had. Last Thursday I got a trademark new Bmw since getting a check for $6474 this - 4 weeks past. I began this 8-months ago and immediately was coming with house at least $77 per hour. I work through this connection, go.to tech marker for work detail.... www.globe-report.com
OT, but FOFOA recently released one of his rare blog updates
$30 000 gold revaluation was proposed. Unfortunately, I think the dickheads in charge now dont appreciate the findings that paper wealth dies and the capital needs to be transferred safely to the next generation of traders
http://fofoa.blogspot.com.au/2015/04/the-golden-phoenix.html?utm_source=...(FOFOA)
I'd rather have a Scottish Bottle in front of me than a Scottish Lobotomy...
Good luck with that.
didnt read the article..
but can still say with absolute conviction FUCK HUGH HENDRY...
not part of the solution then part of the ponzi...
I don't see much activity based on Baltic dry. However, China has been heavily investing into Africa. Perhaps he is tipping us off. I could be wrong. Just my off the cuff thoughts.
If China is so good I wonder why so many Chinese women are moving to Australia, getting married to a White Australian and having multiple children?
At every turn the female is rejecting China. Rejecting the geographic location, rejecting a Chinese partner, rejecting the one child policy, rejecting the education system. In my kneck of the woods this is becoming so common that my wife and I use the code words "GA" (gone Asian) and "GAWO" (gone Asian with offspring) to describe the Aussie men who have been lucky enough to make the conversion.
"If China is so good I wonder why so many Chinese women are moving to Australia, getting married to a White Australian and having multiple children?"
ever heard of the term "trick"...
there's ur answer......
Do you mean urine in your coke?
trick: a sexual act performed by a prostitute <turning tricks>;
meaning Austrailians paying big time for pussy...
just sayin.
Can't all be prostitutes. If I had the most powerful weapon in the world and lived in China, I'd leave, too.
Some economic improvement at the household level really cannot help much with the population problem. Just really very little space to live. Move to OZ, higher living standards, and some actual space. Pretty easy choice if a reasonable opportunity shows up as available.
.
Might as well call hedge fund managers "dudes playing pin the tail on the donkey". They are all completely clueless. The only relevent hedge fund manager is Yellen.
This was a very interesting analysis from Hendry. He conveniently neglects to discuss the rampant retail investor in China as a factor in the recent run-up. But he's right that many of the big macro players are very bearish on China.
"Why From China's Biggest Bear, Hugh Hendry Became One Of Its Biggest Bulls"
Proclaimed bear when bying stocks, and proclaimed bull when holding/selling them ?
I'm impressed that Hendry 'thinks'. He actually has a very plausible basis for his positions.
Of course 'plausible' becomes a fucking serious case of 'you're fucked' if 'authorities' decide to change the plan...
But that's ALWAYS true.
Not quite what I would call a prudent strategy...but WTF do I know. They WILL change the plan, the timing of that is the challenge.
Hugh Hendry is a flake.
He must of did a lot of drugs whe he was younger.
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A stopped clock is right twice a day. (And yes, that means that even Russel Napier will one day get something right).
Hendry is simply riding the Beijing Put - no skill required.
this guys a compete moron. I don't waste my time even peaking at his work.
KILLED FOR THEIR ORGANS
Tens of thousands of Falun Gong practitioners have been killed for their organs in China.
More are murdered every day. Help save their lives and end this crime against humanity.
SIGN THE PETITION TODAY
http://stoporganharvesting.org/
BackgroundThe People’s Republic of China (PRC) performs the second-highest number of organ transplants per country per year, yet there exist no sufficient public organ donation program or organ distribution system in China, and the Chinese population has a cultural aversion to donation.
It is understood that medical professionals in the People’s Republic of China began conducting organ transplants with the use of organs that were harvested from executed prisoners in the 1980s. In June 2001, Chinese Dr. Wang Guoqi testified before the House International Affairs Subcommittee that hospitals worked in collusion with state security agencies to extract organs from executed prisoners without written consent of the donors. These transplants became a lucrative source of income for Chinese hospitals.
The practice of sourcing organs from nonconsenting prisoners is a violation of medical ethics and has been condemned by international medical organizations, such as the WMA, TTS and the transplant community.
In order to protect their families and associates, while in detention, many Falun Gong prisoners refuse to provide their real names or other identifying information. This makes them more of a target for transplant abuse.
In 2006, Canadian researchers human-rights attorney David Matas and former Secretary of State for Asia-Pacific David Kilgour conducted an investigation into allegations of organ harvesting from Falun Gong prisoners. Based on extensive circumstantial evidence, their report concluded that the allegations were true, and that tens of thousands of Falun Gong practitioners may have been killed for their organs.
After 1999, an exponential increase of transplantations in China coincided with the onset of the unlawful and brutal persecution of Falun Gong practitioners. In the absence of a public organ-donation program and a decrease in the number of executions, detained Falun Gong practitioners became part of a living pool of donors, ready to be organ harvested on demand. They have been contributing to the more than 10,000 transplants per year in China.
Falun Gong practitioners are subject to medical examinations while in detention, such as blood tests, urine tests, X?rays, and physical exams. These examinations are unlikely to be motivated by health care concerns since detained Falun Gong practitioners are subject to persecution and torture. It is implausible that the detention centers would go to the extra expense for the exams unless there were financial returns.
There is a significant discrepancy between the number of organ transplants performed in China and the number of identifiable sources of organs, including death row prisoners. The PRC government has failed to adequately account for the sources of these organs.
Senior Chinese Communist Party officials are complicit in the forced organ harvesting from living Falun Gong practitioners. In 2012, David Matas said at the annual conference of the International Association of Genocide Scholars in San Francisco:
“On Nov. 30, 1999, the ‘610 Office’ [in China] called more than 3,000 officials to the Great Hall of the People in the capital to discuss the campaign against Falun Gong, which was then not going well. Demonstrations were continuing to occur at Tiananmen Square. The head of the ‘610 Office’, Li Lanqing, announced the government’s new policy on the movement:‘Defame their reputations, bankrupt them financially, and destroy them physically.’
A call to destroy Falun Gong physically is a call to genocide. It is not admittedly a call to genocide through sourcing their organs. Nonetheless, when that sourcing occurs, in the context of a call for physical destruction, the two should be linked. Organ sourcing is the means. Physical destruction is the intent.”
Under the format of “executing prisoners”, killing people to harvest their organs for transplantation is a crime against humanity and a breach of medical ethics. The demand for transplant organs must not justify the means.
Falun Gong practitioners, the largest group of prisoners of conscience in China, are the main targets of this crime against humanity.
http://www.dafoh.org/petition-to-the-united-nations/
posted by WR;)
Over the past 7 ytears has Hendry beat the - nope.
So why doesn't he just fuck off