"This Is Much Larger Than Subprime" - Here Are The Legendary Hedge Funds Fighting The Chinese Central Bank

Tyler Durden's picture

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.

 

* * *

 

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.

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HedgeAccordingly's picture

Makes you wonder about HF MACRO herding.

Mark Hart: China’s Yuan Still Has 50% To Drop http://hedgeaccordingly.com/?p=19505

Pinto Currency's picture

 

 

When China tells Soros to back off, it is not talking to Soros but the people who direct him.

Who is Soros?

The Secret Financial Network Behind "Wizard" George Soros    http://www.freerepublic.com/focus/f-bloggers/2626002/posts

SWRichmond's picture

Bass is an example of someone who used his brains to show the system he knew how to work it, then drank the coolaid in return for a seat at the table.  Now engaged in financial war with China, for profit, in the service of the oligarchy.  Just another sociopath.

Ghost of PartysOver's picture

Epic short squeeze in the future when the algo's get a hold it.  Too many juicy names to eff over.

Spitzer's picture

Am I the only one on earth that is aware of the fact that China is the creditor in this equation ? 

What are these guys smoking ? Can I have some ?

Mr.Sono's picture

So why is it larger then subprime mortgage?

Divided States of America's picture

Look at those names. Wow. First the Zionist motherfuckers are after Russia, now they are going after China. Is it a coincidence that both are America's biggest enemies?

roddy6667's picture

And Zionists are not America's enemies?

Jews are only 2% of America. A false flag event traced back to Israel with American Jewish involvement would make Hitler's treatment of Jews look benevolent. Every influential Jew could be rounded up in two hours.

How fast did things turn for the Jews in Germany?

ThirteenthFloor's picture

FYI- VP Biden - "you don't have to be Jew to be Zionist, I am a Zionist"

https://m.youtube.com/watch?v=Uo-UXZ-1ups

OceanX's picture

"you don't have to be Jew to be Zionist, I am a Zionist"

Also, you can be a Jew and against zionism: https://www.youtube.com/watch?v=6RjnvQHWyLE

 

 

WHY ORTHODOX JEWS ARE OPPOSED TO A ZIONIST STATE

http://www.nkusa.org/AboutUs/Zionism/opposition.cfm

Fish Gone Bad's picture

I was looking at Einhorn's Greenlight Capital: GLRE. It has been looking sick for going on a year now.  More sickly lately. I really like Einhorn, but I will wait a bit more before I follow him.

Wannabe_Oracle's picture

You do realize that you have been given a warning, nothing more, nothing less. If you lack the understanding between warning and reality, well then, I'm afraid you might just be 'off the reservation'.. ./

ThirteenthFloor's picture

Spitzer+1. These guys are team Fed, playing with debt instruments. PBoC is team production/creditor. My guess these guys know if the Fed falls they lose all.

Truth be told, China gave US a lot of gold/investment at WW2 via TV Soong.

http://online.wsj.com/public/resources/documents/mill-1-timeline.htm

Sorry_about_Dresden's picture

But Kissinger/Nixon/FRBNY had to give the gold back to get a meeting with Mao. No one talks about how the Americans got their invitation into China in 1972 because it is a state secret. I met Norma Litton Sims, who was on a delegation with her husband in 72, was good friends w/ Averill Harriman and Harriman told her that the US sent a few destroyers filled w/ gold bars that had been intrusted to the FRBNY when the Japs invaded Manchuria and never got it back because the Kumantong lost. Just some of the reserves sent to the states in the late 1930s.

We bought our way into the PRC with their own gold.

I damn near died when I met this lady who was the mother of my wife's peer, they were both professors. I totally pumped her for all I could when I asked her if she knew Averill Harriman. One of my alltime favorite conversations and she had no problem spilling the beans. She owned some newspaper in Tennessee and her husband worked at the State Department. Old as dirt but she was very sharp.

It was amusing to have all those, supposed, intellectuals in the same room who know didn't diddly squat about anything of any importance. They never did an honest days work, producing anything of intrinsic value, and wrote endless papers they would send back and forth and go to meaningless conferences to praise one another. They had no idea what a resource this woman was and the amount of the rich history of the cold war and the endless stories in her head. Now I am wishing I could have helped her write her memoirs.

I got to tag along with my wife and travelled the world going w/ her on conferences but I only met a few people worth having a conversation with. 

TheReplacement's picture

Perhaps China will come out on top and perhaps it may not.  Either way it does look like there is significant profit to be made by betting against them in the short term.

pitz's picture

Its bizarre shit.  Everyone knows that deflation and debt collapse leads to a much higher currency.  Devaluing the Yuan is just a pipe dream.  The global economy needs a much higher Yuan to transition manufacturing away from China, and to create domestic consumption in China.

FreedomGuy's picture

The problem is that China is playing the export or mercantilist game that Japan played in  the 1980''s. It was great while it was working.

People understand their game. It is in the open. So, to keep the game going, China has to keep devaluing. They have so much excess capacity that they are dependent on exports and it is priced for export  not domestic. It is why they put at least a 100% tariff on foreign goods while getting MFN from the U.S. and others.

Their debt is bad so their currency looks bad and interest rates should spike to reflect risk but it will probably be controlled downwards, at least as long as they can.

It all leads to a weak currency. Maybe we will be able to buy all of China for a Franklin one day. Who knows?

I am actually cheering for the hedge funds.

Sanity Bear's picture

China's usually pretty good about staying within the bounds of the Evil Overlord List, but this is treading awfully close to a Rule 24 violation.

http://www.eviloverlord.com/lists/overlord.html

pitz's picture

I'd argue that all of that excess export capacity will need a high Yuan to truncate it.  Not a weak one.  China won't be able to devalue, that's the point. 

BitchesBetterRecognize's picture

I guess the FED & Wall Street still believe they can "outprint" the chinese's debt....

Sorry_about_Dresden's picture

The PRC holds less than $1.5 trillion in Treasury paper. They can print that in a weekend.

new game's picture

what if, china rolls out a gold, silver and copper backed coinage and paper certificates backed by phys? huh? then heymen is toast, yup, lehman...

just sayin...

Pinto Currency's picture

 

 

Hayman is long gold.

The goal of Soros and his overseers is to triggr a crisis.

They want a crisis to restructure the world map. 

"Convergence' is what they call it.

http://www.thenewamerican.com/world-news/europe/item/17843-george-soros-s-giant-globalist-footprint-in-ukraine-s-turmoil

new game's picture

i want oto believe in this convergence as you mention, but i believe there is only room for one sociopath at a tyme trying to get control, much less believing these fuckers actually being united for a nwo. 

maybe it like a pack hiennas and i got it wrong, but i see them as like a packs of wolves defending their territories...

Pinto Currency's picture

 

 

Don't blame Hayman.

Bass is just watching and thinking.

Soros and his masters are actively destabilizing.

new game's picture

kyle is a very smart and articulate man. i just was speculating what could go wrong with a crowded trade. as far soros goes, his record speaks as you say. truely a sociopath surrounded by psycopaths do his bidding.

the world order will never work if one gives it deep thought. to many avenues for revolt to contain that many sheep in a fence that will have many escapes. captain klink anyone, hogans heros, ha...

Mintcoin's picture

As long as you have fractional reserve banking, It is impossible to roll out a gold, silver, and copper backed currency. You either have one or the other cannot have both.. Tell me, when will fractional reserve banking cease to exist? Anytime soon? 

BullyBearish's picture

Yeah...but did he sell his nickels to short Yuan?

MASTER OF UNIVERSE's picture

If they collectively shorted the American currency the CIA would assassinate them all in less than a week.

Chupacabra-322's picture

Hmmmmmm, that doesn't sound like a bad trade off.

Argos's picture

I'm not betting against Kyle Bass in this life time.

Escrava Isaura's picture

 

 

Argos: I'm not betting against Kyle Bass in this life time.

Because you drank too much Bass Kool-Aid and now you can’t think your way out of a paper bag.

 

More Than Meet The Eyes……Lots More

The Chinese are in the process of displacing the monopoly of the US dollar…. Fearing the eclipsing of the US dollar and the Bretton Woods system by a rival financial architecture the US response has been an attempt to damage the Chinese markets and increase the value of China’s currency.

As the financial architecture of the world is being altered by China and Russia, the US dollar is gradually being neutralized as one of Washington’s weapon of choice.

Banks and governments in the European Union had been considering and examining the use of China’s national currency, renminbi/yuan, as a reserve currency.

The financial market webpage Zero Hedge, which had been following this development, explained…….

Despite the wishes of Wall Street and Washington, the Silk World Order is moving forward.

http://www.strategic-culture.org/news/2015/08/30/washington-financial-currency-war-china-eclipsing-us-dollar-yuan.html

 

 

MSimon's picture

The Chinese are in the process of displacing the monopoly of the US dollar

 

To do that they have to export yuan. They are shrinking the yuan stockpile (reducing liquidity). The US dollar is in no immediate danger from China.

 

In the US - financial dervices sop up dollar excess. Now who exactly trusts Chinese financial services? Compare that with US services. Who exactly is the Chinese GS?

NoWayJose's picture

Central banks will soon learn from the hedge funds and algorithms (and Fed). We can easily see the Chinese Central Bank 'go long' in the market - then intervene to drive the Yuan higher. This is made all the easier when they get to set the range for the peg.

SillySalesmanQuestion's picture

Can we get a simple prop bet on this?

scubapro's picture

 

 

they arent 'fighting'.  picture a matador, and an ignorant bull.   one is stonger, the other smarter.

bid the soldiers shoot's picture

don't forget the banderilleros and the picadores.  we don't want a fair fight if we can help it

gmak's picture

"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."

 

Huh!? When China devalues the Yuan they are actually pushing the USD higher w.r.t. the Yuan.  How is this fighting the FED's "aggressive attempts to push the USD ever higher"?

 

Editor much?

Babaloo's picture

Thats just evidence that the guy who wrote this doesn't really know what he's talking about.  Happens all the time on ZH.

Spitzer's picture

Yep

But even these hot shots don't seem to be aware that China is a creditor nation and the Yuan is a creditor currency

Yen Cross's picture

Until those(F/X) reserve levels drop under a certain level, it's just tonsil hockey.

Soul Glow's picture

They're dropping pretty fast.

Yen Cross's picture

 A smart man you are ;-) That's why we're seeing all these wierd fluctuations ... Not only the offshore spreads,[Hong Kong] but also other EM currency spreads.

DipshitMiddleClassWhiteKid's picture

Time to look into shorting the THB & SGD eh...

 

Most of these dudes are shorting asia via derivatives though...how long until the spot market catches up? 

 

What they didn't mention was everyones attack on the Mexican Peso........... 

Spitzer's picture

Yeah let's short everything against the dollar. No bubble to see here... 

Yen Cross's picture

 hedge the $usd

 Bond and F/X traders,  understand things before the clown equity whores.

 We see the meltdown/

VW Nerd's picture

Parasitic "investing".  This sort of predatory gaming inflicts suffering on millions.  Kind of bothers me....

Pheonyte's picture

Goes to show you what a complete dick Soros is. He's been saying how he now feels bad about his trade against the British pound, and yet here he is doing it again.

bluskyes's picture

The profits ease the pain.