"It's Not Worth Fighting" - Hedge Funds Are Dumping Their China Shorts

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”).

Kyle Bass

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.

Here’s Bloomberg:

“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.


Money Boo Boo Tue, 09/12/2017 - 23:12 Permalink

Hard to bet against Institutionlized fraud.  Wall Street proved that in 2008.  Too Big to Jail is real and the Chinese are some of the dirtiest players in the game.

OpenThePodBayDoorHAL Quantum Bunk Wed, 09/13/2017 - 18:03 Permalink

Back to the Econ textbooks for you.CBs (except Ecuador) do not create money, commercial banks do.In China's case the CB sets quotas for bank credit. You WILL issue this much in loans this quarter.It finds its way out to all sorts of SOEs. But recall that China is COMMUNIST. They can do debt for equity swaps with those institutions overnight and nobody screams "but Capitalism!".You're welcome.

In reply to by Quantum Bunk

bankonzhongguo Tue, 09/12/2017 - 23:21 Permalink

Wall Street adopted China's and the Party's political culture after the internet bubble popped.All those Ivy League MBAs running the Fed and GS are CCP wannabes.That is the playbook - be the bank of last resort and hold the nation hostage to stay in control at all costs.That's it.No markets. No price discovery.Just money printing and spreading it to the top 0.1%. 

Quantum Bunk Tue, 09/12/2017 - 23:26 Permalink

Shorting Yuan with dollars is like shorting the drug dealer with the cocain addicts money. China industrialized and modernized under a hard peg to the USD. The Yaun is systemically undervalued. We know this because the PBOC always intervenes to devalue. It only sells reserves when it overshoots the devaluation.The PBOC was only adjusting the floor of the peg when it sold reserves and bought Yuan. (adjusting for overshoot). But people mistook that for banana republic style currency support. Im on Twitter@PaulHol5000

Yen Cross Tue, 09/12/2017 - 23:29 Permalink

     China needs to float the yuan.  No more trading bands.  For a minute, just think about how much yuan is floating around.  If china floated the yuan, I'd suggest revaluing both the CHF and YEN in the DXY basket. Yen and Chf are way overvalued.

Yen Cross Quantum Bunk Wed, 09/13/2017 - 00:43 Permalink

 Agree. There will be initial pain, but the revaluation with " in a nominal way", wipe alot of paper debt off the PBoC balance sheet.  The simple fact is that the world can't grow it's way out of the debt bubble it's created. We live on a planet with finite resources, and adding extra credit into the system, just causes misallocation of resources. There's plenty of resources, based on current demand. We need to be more efficient, and quit wasting those resources. Central banks have created these problems VIA hidden inflation, liquidity/credit infusions, and lack of responsible governance.

In reply to by Quantum Bunk

The Dogs of Moar Wed, 09/13/2017 - 02:12 Permalink

It's pretty clear what happened to Bass et alia. After the US coup
In Ukraine in February 2014, China stopped strengthening the yuan
and began to weaken it. Washington (Obama) thought the best way
to handle that would be to start a rumor/run on the yuan. Then Beijing
would be forced to step in and support the yuan.

So the Treasury let it be known how much trouble China and the yuan
were in. They fed receptive hedge funds stories about Chinese debt
and turned several managers very bearish to increase pressure on
Beijing not to let the yuan get too low and make the dollar and US
exports uncompetitive.

The yuan was never in the bad shape that Treasury said it was and
China managed to control the US' short selling. They never allowed
the yuan to break over 7 for any length of time. And all the yuan bears
who devoted their days to shorting the yuan and articulated why they
continued to short the yuan, we're just thrown under the bus by Obama.

It turned out that US loved it's strong dollar as they sold billions and billions of dollars worth of missiles to the NATO members who were forced to
spend 2% of their GDP on defense, iow Americas Defense Industry.

The huge NATO build up in Eastern Europe occurred because the US
wanted to sell arms to Latvia and Rumania.

Just another event proving how demented life really is.

FreeEarCandy Wed, 09/13/2017 - 05:04 Permalink

China's debt to gdp ratio is 300%They say this debt is not a problem because it is internal. Let me explain.The state owned banks lend money to the state owned firms. The firms go bankrupt and ????....Hmmm??? Ok lets try this...A China man sticks his head up his ass. The reason he does this is because he can now eat his own shit and never go hungry and starve to death. Yeah! that's how it works.So when you see a china man walking down a silk road with a shit eating grin you know he is a success!

falak pema FreeEarCandy Wed, 09/13/2017 - 06:00 Permalink

Both Germany and China are EXPORT economies with ability to cover their debts over years by their current account surpluses.For your info the Germans have generated over 2 Trillion Euros of current account surpluses since the 2008 crisis; whereas the US has generated 4-5 trillion of current account deficits all funded by FED print...The difference between having productive efficiency and having productive deficiency in economic terms.The ECB is up the shits to the extent that both Club Med countries and All EU banks are in the red--the latter because they are the private sector creators of this global fiat mess-- and the Germans have to carry that bag of tricks !SO the CB deficits are globally spread; not just ONE country responsible; and the biggest gorilla in that cave is the US with its $ hegemony built on zero interest print and stocks to the moon; the guy who has the MOST TO LOSE AT RESET !

In reply to by FreeEarCandy

FreeEarCandy falak pema Wed, 09/13/2017 - 10:28 Permalink

Well maybe these 2 great export economies should become each others costumer. Germany can leave the EU and the euro and slide down that silk road of prosperity and become the hand that feeds China. Let me tell you this. China, as an import economy, will last about 2 seconds. China is a parasite economy that has no interest in fair and equal trade. Germany should turn over all of their intellectual property to China and see how that goes.But here is the bottom line. As long as the USD is pegged to oil, the USD will be in demand. China's Yuan is pegged to slave labor and when the robots & AI arrive the hand that feeds them will withdrawal. 

In reply to by falak pema

falak pema Wed, 09/13/2017 - 05:43 Permalink

Goodbye Kyle; the day of the Imperial HFs; riding the outsourced wave of the $ hegemony; screwing the world based on "our money your problem"; is now over.Bad day at China Rock, as the new silk road unfolds, even as the Nork gets bold to the point of holding the Duck by his Mar a Lago and Trump tower golden nuts! Mattis must be chewing his hat! And Bannon cleaning his loose cannon.O Irma you are no soft touched lady of the lake; you are Camelot's dream floating away.

Money_for_Nothing Wed, 09/13/2017 - 06:57 Permalink

China can crush all the shorts. Federal Reserve will help them. China can do everything but make a central managed economy work. Does anyone think they are better than the Soviets where?

China will do fine till all the external players quit trying to make money in China. Then China will rest on the management skills inside its boarders. I suspect that the amount of talent leaving Hong Kong is significant.

"Shorting a CREDITOR nations currency with a DEBTOR nations currency is not good for your financial health."
China is practicing vendor-financed-sales. All those US Treasuries that China owns are entries inside a computer ledger controlled by the US Treasury. Most of the dollars China makes and spends are inside computer ledgers that are effectively controlled by the Federal Reserve. The Federal Reserve and the US Treasury could short the Yuan if they wanted to. Why would they want to?

rex-lacrymarum Money_for_Nothing Wed, 09/13/2017 - 20:54 Permalink

Let's just say, economic laws have not been magically repealed... and the central planners in China will eventually be rudely reminded of this fact. As to the hedge funds unsuccessfully shorting China: trying to time the demise of a credit bubble essentially requires sussing out how much capital is consumed vs. how much is accumulated, and correctly estimating the point in time when the two trends suffer a "death cross". Hedge fund managers looked at traditional metrics (debt ratios and the like) and many of the dubious lending and investment practices in China and figured the Mandarins were due to lose control over their inconvertible currency -  or rather, would be forced to devalue it so as to maintain "social harmony".I think one of the problems with this was that "measuring" China's economy is still an incomplete project. Every two or three years China implements a major overhaul of its economic statistics because the government realizes it has actually overlooked large swathes of economic actvity. It shows that in many ways, the private economy is still new to them. There may be much more accumulated capital than hitherto assumed. They also ignored an aspect of China that admittedly must appear increasingly alien to Western welfare state dwellers: the fact that the entrepreneurial spirit is alive and well there. Go to China and you will marvel at the energy and enthusiasm of young entrepreneurs. It is light years from the cynicism and despair that has gripped the overtaxed and over-regulated class of movers and shakers in the welfare states of the West (particularly in Europe). Lastly, they also erred in thinking that the massive yuan devaluation of 1994 was some kind of useful template. It never was; at the time, China's forex reserves and its share of international trade were minuscule compared to today. China's planners are eager to preserve good relations with important trading partners, because they are well aware that the export industry still is very important for China at this point (they hope to graduallly change that of course). They don't want to rock the boat, hence the sub rosa "Shanghai accord", the existence of which every G20 government vehemently denies (and yet, it definitely exists, informal though it may be). 1994 style overnight yuan devaluations of a comparable size will never happen again imo. In summary, I think they had the right idea... but they didn't consider that they perhaps knew a lot less about China than they thought they knew, and that their timing may therefore be off quite a bit. The fact that they have all decided to back off now is a heads-up though that the day of denouement is coming closer. 

In reply to by Money_for_Nothing