Article Highlights

  • China's PBOC seen determined to keep yuan stable short-term
  • Series of measures make it more difficult to bet against yuan
  • Those pulling back include very large U.S., European funds
  • Some investors still expect to put bearish bets back on
  • Dallas hedge fund manager Kyle Bass sticks to short position
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A slew of Western investors and traders who placed bets in the past two years that China’s yuan currency would drop because of a weaker Chinese economy, the threat of a debt crisis, and capital outflows, abandoned those positions in recent months.

They have decided that – at least in the short term – they may well be on a loser if they try to fight the People’s Bank of China, the nation’s central bank, which has been taking a series of measures that appear aimed at keeping the currency stable.

This is particularly the case ahead of an autumn congress of the ruling Communist Party of China, that is expected to allow Chinese leader Xi Jinping to consolidate his power.

Also, the Chinese economy has been more robust than expected, the nation’s authorities have taken stiff measures to reduce capital outflows, and the U.S. dollar has been retreating from gains it made last year.

Major global fund managers – such as Goldman Sachs Asset Management, Old Mutual Global Investors, Standard Life Investments and Aviva Investors — have taken off short yuan positions even as many of them see some weakness further down the road.

The PBOC has made some moves to defend the yuan, which is also known as the renminbi. It has pushed up the cost of short-selling the currency and even changing the way it sets a daily mid-point used as a benchmark.

“They are not happy with a really weaker renminbi,” said Mark Nash, the London-based head of global bonds at Old Mutual Global Investors. “People obviously don’t want to fight the central bank.”

Nash, whose firm manages $44.7 billion globally, said he had been short the yuan at the turn of 2017 but took that position off early in the year.

But he said he believes the strength in the yuan is reflective more of “an exercise in financial regulation” rather than an improvement in China’s economic outlook and hopes to go short again soon.

Standard Life Investments’ Hong Kong-based emerging markets fixed income fund manager, Mark Baker, said he gave up his short yuan position in the first quarter of 2017, after seeing the success China was having with capital controls and some improvement in economic data.

“There is a desire to rein in expectations that the currency is merely a one-way bet,” he said.

The PBOC did not respond to a Reuters request for comments for this article.

The yuan has risen 2 percent against the dollar so far this year. In the latest policy tweak, the PBOC has included a “counter-cyclical factor” in its method for fixing the daily mid-point around which the currency is allowed to trade.

The adjustment to the fixing method in May was the second this year and came after a string of capital control moves, all aimed at stopping domestic Chinese investors from moving cash abroad.

That has put a floor under a currency which fell 6.5 percent in 2016 and 4.5 percent in 2015. Concern about the decline led the central bank to spend a billion dollars over 2-1/2-years to defend the yuan.

Short yuan positions are expensive. It costs about 5 percent annually to own and short the yuan directly based on short-term borrowing costs, though there are a myriad ways in which an investor or trader can structure a short bet.

Some investors interviewed for this article said they mainly use offshore forward currency contracts – settled for cash at a particular date – which makes the trade somewhat cheaper.

Intentions Unclear

Beijing is also keen on keeping the yuan strong so that U.S. President Donald Trump isn’t given any reason to take tough trade measures against China.

During the election campaign, Trump had accused Beijing of manipulating its currency to make Chinese exports more competitive, hurting U.S. companies.

The stronger yuan also helps to dissuade Chinese companies and citizens from moving money offshore.

Jonathan Xiong, head of the fixed income alternatives group at Goldman Sachs Asset Management, said he closed out his short yuan positions at the beginning of the year as China’s growth prospects improved.

Stuart Ritson, head of Asian rates and FX at Aviva Investors, with about $453 billion under management, removed his short position around the end of the first quarter, and is now positive on the yuan owing to the PBOC’s preference for a stronger currency, reduced capital outflows and because the yuan offers one of the best yields relative to volatility among emerging market currencies. Ritson hasn’t taken a bullish bet as yet.

Not everyone has left the trade. Kyle Bass, the founder of Dallas-based hedge fund Hayman Capital Management, has kept his short position because he says he believes the nation’s credit bubble problems are “metastasizing.”

Bass, has long argued that the Chinese yuan is set to fall 30 percent against the U.S. dollar. “The numbers are telling me that we are right. The numbers are getting so bad so quickly,” he said.

But even those who see the currency weakening have pulled back their forecasts. Deutsche Bank’s chief China economist, Zhiwei Zhang, sees the yuan ending the year at 7.1 per dollar, rather than the 7.4 he was forecasting at the beginning of the year.

There should be some weakness, he says, because economic growth is likely to slow, capital controls could become less effective over time and the dollar may not continue depreciating,

At the other end of the spectrum are fund managers such as Jan Dehn, London-based head of research at asset manager Ashmore Group, who says he believes the market shouldn’t be blind-sided by conspiracy theories.

“The recent stabilization of the yuan has perfectly sound foundations and can be explained without having to resort to some suspect or obscure schemes on the part of Chinese policy makers,” said Dehn.

(Additional reporting by Jennifer Ablan in NEW YORK and Kevin Yao in BEIJING; Editing by Martin Howell)