Pretty soon, China bears will be as rare as the Giant Panda.
At least that’s what Bloomberg suggested in a story about how Chinese markets have continued to defy proclamations that country’s economy would soon collapse in an avalanche of bad debt, exposing rampant corporate fraud. Or that a rash of outflows and the pressure of short sellers would force a massive yuan devaluation. Or that the exposure of rampant fraud and abuse in its corporate sector would tank local markets, which rely heavily on shady investment products.
We’ve repeatedly noted when fund managers who once loudly touted their China-related positions either moderated, or changed their minds completely. Just last week, Corriente Advisors’ Mark Hart announced the end of a seven-year options position that would’ve seen a massive payoff if the yuan dropped 50%. As we noted, he’d spent $240 million rolling over the options.
Before that, Kyle Bass, during an appearance on Adventures in Finance, said that while he was 100% certain his thesis will ultimately prove correct, calling the timing has obviously proven difficult.
Bass, in his interview, cited shady retail investment products that have been used to backstop $40 trillion in debt with only $2 trillion in equity as a looming sign of a collapse. (We’ve also noted other questionable financing deals like the use of collateralized commodity transactions, which we discuss in greater detail in “Did China's Bronze Swan Just Arrive? Copper Inventories Crash Most In History”).
Bloomberg has a more complete accounting of how hedge fund managers’ views on China have “evolved” this year, as the promise of the Shanghai Composite’s massive correction, and subsequent yuan devaluation in 2015 proved to be teasers for deeper declines that never materialized.
Crispin Odey (Odey Asset Management): Said the yuan would slide 30% against the dollar after its 1.8% devaluation in August 2015.
“Odey has moderated his views - somewhat. He’s shorting metal stocks on expectations that China’s economy will slow in the second half. But he says betting against the yuan is no longer worth the trouble. ‘They can control their currency very easily,’ he said in an Aug. 8 interview, citing China’s massive current-account surplus. ‘It’s not really worth fighting very much.’”
Kevin Smith (Crescat Capital): Smith said the yuan was “massively overvalued” before the August 2015 devaluation. Now, he is one example of a bear who’s standing by his position despite absorbing stomach-churning losses.
“Smith is sticking to his bearish bets via currency options and short positions in Chinese stocks, even after his macro fund lost about 12 percent so far this year. He said last month that his “mid-target” for the yuan is a 70 percent plunge over the next year.”
John Burbank (Passport Capital): He said in late 2015 that a hard landing in China could trigger a global recession. In May 2016, he called for a major yuan devaluation. Though he hasn’t publicly commented on China in a while, Bloomberg says a July 31 investor letter suggests his “views have moderated.”
While he predicted China’s restrictions on housing and credit this year would be “detrimental” for commodity demand in the second half, he noted that the Communist Party continues to support the economy.
“Recent economic data has in fact been supportive of a continuation of strong growth near-term, with a slowdown possibly pushed to 2018,” Burbank said.
Douglas Greenig (Florin Court Capital): He said in June 2016 that China might devalue its currency because of Brexit.
Now his “quantitative modeling” has changed his mind; he’s now a China bull.
“Locals could sell more currency, but foreign inflows may offset that,” he said in a phone interview.
In summary, Chinese markets have performed strongly this year. Despite calls for further weakness, the yuan has rallied more than 6 percent from its eight-year low against the dollar in December. Chinese credit markets have quieted down after a period of turbulence triggered by a PBOC crackdown on rampant lending, and the Shanghai Composite Index has rallied to its highest level in nearly two years.
Still, at least for yuan bears, there may be a silver lining. The PBOC recently struck down a policy that required sales desks to hold 20% of revenues from sales of FX derivatives in reserve – effectively opening the door to short-sellers as the bank ironically now seeks to stem the currency’s advance against the dollar.