China Capitulation: Corriente Advisors' Mark Hart Ends 7-Year Bet On A "Massive Yuan Devaluation"

China bears like Kyle Bass claimed victory last year after bets that the Chinese yuan would weaken paid off handsomely – particularly if they were supercharged by leverage. Hopefully, for their sake, yuan decided to lock in those gains early this year. Because since January, China’s currency has whipsawed higher, reversing most of its 2016 depreciation as the US dollar has endured a period of broad weakness, and Chinese policy makers have turned their attention to managing the currency’s valuation against a basket of currencies.

But Mark Hart, who, like Bass is a Texas-based fund manager, and who built his bear case against China on the theory that the PBOC would opt for a series of one-off devaluations in the yuan, instead of allowing it to gradually depreciate, which would be tantamount to a policy error.

Here’s more from a post on Hart’s outlook that we published last year:

“Hart believes that the Chinese crawling devaluation is an error as it carries with its the latent threat of much more devaluation in the future, thus encouraging even more outflows, which in turn forces China to sell even more reserves, which destabilizes the economy even further, forcing even more devaluation and so on.

 

Instead, a one-off devaluation would allow policy makers to “draw a line in the sand” at a more appropriate level for the yuan, easing pressure on China’s foreign-exchange reserves and removing an incentive for capital outflows, according to Hart, who’s been betting against the currency since at least 2011. He adds that China should devalue before its $3.3 trillion hoard of reserves shrinks much further, he said, because the country can still convince markets it’s acting from a position of strength.”

According to Hart, while a devaluation this year would be “jarring” and may initially accelerate capital outflows, it would ultimately put China in a stronger position. He said the country could explain the move by saying it would put the yuan at a level more reflective of market forces and allow the currency to catch up with declines in international peers.

However, the 50% devaluation that Hart had been anticipating never materialized. So, after seven years, Bloomberg is reporting that Hart has (pun intended ) had a change of heart after spending $240 million on his losing bet against the currency, which nearly cost him his sanity.

Hart is now taking the other side of the trade, joining the ranks of Bridgewater Capital’s Ray Dalio and other yuan bulls:

“Mark Hart spent seven years and $240 million waiting on a crash in China’s currency.

 

He lost sleep. He lost clients. He damn near lost his sanity.

 

And now he’s lost his conviction: Hart, who called for a more than 50 percent yuan devaluation last year, has turned bullish on China and its currency.”

According to Bloomberg, Hart’s dedication to his short-yuan position left employees demoralized at his Fort Worth, Texas fund. Hart claims that his investing thesis was sound. His biggest mistake? Hart says he was “too early” in putting on the trade.

“His reversal hasn’t come easily. From his base in Fort Worth, Texas, the hedge fund manager spent countless nights on the line to Hong Kong, parsing market news and exchange rates. At times, the stress took a toll on Hart personally and left his employees demoralized.

‘I always thought we had a good risk-reward trade on, but we made a number of mistakes, including being way too early,’ Hart, who started the yuan bet after predicting both the U.S. subprime mortgage bust and the European debt crisis, said in a telephone interview. ‘And now the world has changed.’”

Hart now believes that G-20 leaders tacitly conspired to a “Plaza Accord”-type agreement to stanch the dollar’s appreciation while putting a floor under the yuan last February during a G-20 summit in Shanghai.

“In cool hindsight, the 45-year-old founder of Corriente Advisors sees last year’s Group of 20 summit in Shanghai as a key turning point. Like many investors, Hart suspects the meeting resulted in a tacit agreement among world leaders to prevent the yuan from tumbling. He calls it China’s “whatever it takes” moment - when policy makers resolved to prop up the currency at any cost.”

The agreement has tremendously benefited China, Hart says.

“‘China now has the breathing room it needs to either temporarily stave off a slowdown with fiscal and monetary stimulus, or reform, grow and upgrade itself into the world’s largest developed economy,’ Hart said.”

Regardless of whether Hart’s “conspiracy theory” is accurate, China has clearly succeeded in stabilizing the exchange rate. The yuan ended a three-year slide in late December and has rallied almost 7 percent in 2017. China’s central bank strengthens its daily reference rate for onshore yuan for a ninth day on Thursday, the longest run of increases since January 2011. The PBOC raised the yuan reference rate by 0.06% to 6.5269 per dollar, extending the strengthening streak since Aug. 28 to 2%. Meanwhile, the offshore yuan surged, sending the USDCNH below 6.50 for the first time since May 3, 2016.

Even at its weakest point, the yuan never weakened enough for the options that Hart originally purchased in 2009 to pay off. His dedicated China funds, which had fixed lifespans, bought options that were designed to deliver one of two outcomes. According to Bloomberg, a massive payoff in the event of a currency crash, or a near total wipeout if a major devaluation failed to occur.

Comments

VD (not verified) Thu, 09/07/2017 - 22:51 Permalink

more and more, "investing" more at speculating is just an idiotic persuit, irrespective of how you end up on your well reasoned thesis coin toss. if this schmuck called it, then he's a genius as function of china central planning, or he was wrong (for now) and assed out. the ponzi casino. tulipcoins. etc.

t0mmyBerg VD (not verified) Thu, 09/07/2017 - 22:58 Permalink

speculating is the name of the game.  different than just investing.  hart is a very smart guy.  i watched his explanation of this trade a few years ago and it makes perfect sense.  and he is right about the shanghai accord.  if you look closely at most of the worlds traded currencies during that week, you can see there was clearly a sea change and it is obvious it was a coordinated effort.  It is also what stopped the downdraft in equities.if there is one error in the thesis it is not weighting the fact that china is a closely coordinated state run economy with some mostly smaller businesses mostly allowed to operate freely, and  as a quasi planned economy they have a very wide range of tools at their disposal to forestall the kind of collapse he bet on almost indefinitely.  but mostly as the bond vigilantes have been essentially neutered by the central banks, we live in a weird kind of fantasy land where no one can call bullshit until the imbalances become so incredibly extreme it boggles the mind.  we are not there yet.

In reply to by VD (not verified)

VD (not verified) t0mmyBerg Thu, 09/07/2017 - 23:02 Permalink

which is why speculating/investing/gambling/whatever in today's "markets" is bullshit. allocating capital to PRODUCTIVE industry is the true name of the game, or why we are at the extremes of (wealth) inequality in a hopelessly structurally perverted and broken system. and yeah, your comments on china are so obvious such that hart is one dumb fuck for being such a "smart" guy.

In reply to by t0mmyBerg

Yen Cross Thu, 09/07/2017 - 23:07 Permalink

  The usd/cny fix was over 200 pips lower today. Let's see how much Chinese shit people buy with the strong Yuan and the $usd being hammered into the dirt. I can't ever recall so much $usd bashing on a daily basis in all the years I've been trading. Let's see how many people buy European cars and services?

Yen Cross VD (not verified) Thu, 09/07/2017 - 23:25 Permalink

 I agree with your comment. The fact that I was making, is that the U.S. is China's largest trading partner, and that Chinese shit priced in stronger Yuan becomes more expensive for the U.S. consumer. Personally I 'd have no problem with the Chinks falling off the face of the Earth, and bringing manufacturing back to the States.

In reply to by VD (not verified)

Pliskin Yen Cross Fri, 09/08/2017 - 00:32 Permalink

I can't figure you out, Yen.  Sometimes you seem smart, but comments like this...'Personally I 'd have no problem with the Chinks falling off the face of the Earth, and bringing manufacturing back to the States.'...just make you sound dumb!Do you think if manufacturers, mostly U.S. pulled out of China, they'd come crawling back to the U.S?  Having to deal with minimun wage, unions, pensions, holiday pay, sick pay, maternity pay, and all the rest?  They 'might' pull out of China, but believe me it won't be to go back to the U.S. they'll move into Africa, Bangladesh, India, Indonesia or any other country where they can make maximum profits while paying shit wages with zero benefits.I guess when that happens you'll have another nation of people to hate for it, won't you? 

In reply to by Yen Cross

WallHoo Pliskin Fri, 09/08/2017 - 05:56 Permalink

China has special trading rights or should i call them,the regular that the US shares with other first world nations.This was made in the 80s in order to break up china from the soviet union. The bangladeshi african indian and whatever,either dont have those rights or they are not organised in a way that the chinese are.The chinese also are taking full advantage of the monetary policy a country can have plus they are very well organised at a centralaised level AND as i said before they can trade "freely" with the US.Let alone tha they also have the infastracture needed for trade(roads,cheap electricity,ports etc...). Now if china somehow disapears it is true that all those jobs will not go back to the US but there are gonna be a lot of opening everywhere.

In reply to by Pliskin

just the tip Thu, 09/07/2017 - 23:15 Permalink

so.  does this mean soros is getting fucked on his bet against the yuan?  i hope it gives him a fucking heart attack.  i of course mean that in the literal sense, as figuratively he has neither heart or soul.i am not a cruel person.  i am not wishing his demise.  i just hope it incapcitates him so that he is not able to walk or talk or communicate in any manner.  no use of any of his limbs.  only receive liquid nurishment.  i hope is eyes and ears work perfectly fine.  i also hope he is able to piss and shit himself for the next 100 years.

Golden Showers Thu, 09/07/2017 - 23:19 Permalink

Well, Mr. Canned Peas with the receding hair line can mow my fucking lawn.Just don't show up in a fucking jogging suit. That's all I ask. A "hart" is a "red deer". Hope he can drive a John Deere down on the farm.

Lego Brave Thu, 09/07/2017 - 23:21 Permalink

You are an idiot if you think China is NOT going to be the next super power. Glad both of us are betting (laugh) i mean rigging gold to be at the center of financial power.Uhh keep buying crypto, lemmings!

Yen Cross Thu, 09/07/2017 - 23:35 Permalink

  I would NOT be short $usd right now. It's taken out the 50% Fibi of the whole 78.78- 103.80 move, on absoluterly nothing but jawboning from Draghi, and central bank gaming. There's absolutely no attractive R/R scenario at these levels, and the shorts are going to get crushed as we move into the European problems this Fall. Where's Greece, Italy, Spain? This move was way overshot, as usual.

nevenbridge Thu, 09/07/2017 - 23:40 Permalink

china is exporting deflation. "Massive Yuan Devaluation" it means china wants to totally destroy production in other countries, it means "buy china or dont buy". The west of the world is going to be crushed with this "free market" fetish.

dubaibubble Fri, 09/08/2017 - 00:44 Permalink

this guy had the the devaluation right, just not the timingBeijing will have no choice but to devalue as factory orders dry up looks like he will be on the wrong  side of the trade again now that he has flip-flopped 

Herdee Fri, 09/08/2017 - 00:00 Permalink

China will devalue just like the Americans are doing right now? Where have we seen the race to the bottom for currencies before?

Yen Cross Herdee Fri, 09/08/2017 - 00:18 Permalink

  You're absolutely correct. The only reason that the Yuan has gained, is because the $usd has lost so much value over the last nine months. With the holiday season coming up, you can bet your ass the yuan is going to weaken for exports.   As far as the U.S. goes, homegrown demand driven inflation is a good thing.    Expensive deficit widening [stagflated] Chinese shit> not so much<

In reply to by Herdee

icm63 Fri, 09/08/2017 - 01:13 Permalink

The $USD may continue to FALL, under TRUMPs no 'debt limilt' stance. China sort of pegged to $USD, so less pressure to devalue as it makor competitor (Germany) is suffering under the stronger $EURO YES, correct ??

ds Fri, 09/08/2017 - 02:37 Permalink

He has his skin in the game (laudable) but got skinned believing that the China Ponzi must implode according to some timeline that can be enforced by global markets. PBOC fears global markets and what they can do to RMB that derail their balancing of their economy and reforms. Out of the fears come respect for agnostic global traders (Goldman included) who are paid handsomely to advise on defenses against global markets. He may be right in the long term but in the long term his fund is dead. (Parpaphrasing Keynes).There is a chinese saying "with money you can pay the devil to do your works".  

sinbad2 Fri, 09/08/2017 - 05:16 Permalink

Because American and Chinese culture is so different, Americans simply cannot understand China.In American culture, money is an end in itself, to China money is simply a tool.I remember Americans saying that because the US owed China a trillion dollars, America had China trapped. When the US decides to hassle another country, it always goes after their money, money is God in America.For China, money is simply a means to an end. China would burn that trillion dollars tomorrow, if it would rid them of America.