Overseas Short Selling Of Renminbi Pactions Increases Expectations For China'S Economy

The risk of a "hard landing" of China's economy and the possibility of the appreciation of the renminbi are making the strength of the renminbi short.

When all the funds were betting on the continued appreciation of the renminbi, some of the minority chose the opposite direction.

"We are actually shorting the renminbi."

Karen Thompson, chief investment officer of New York Investment Companies Bienville Capital Management LLC (Cullen Thompson), said that the possibility of depreciation of the renminbi against the US dollar is at least greater than that expected by the market consensus.

Recently, the price of short selling of RMB options in overseas markets has risen slightly, indicating that the short selling of Renminbi is increasing.

Although the mainstream opinion of the market still sees more renminbi, there has not been any turning point. However, the emergence of a few short pactions means that there is a divergence of expectations for the appreciation of the renminbi against the US dollar.

This is due to the fact that since the reform of the exchange rate system, the RMB has risen quite a bit, on the other hand, the market is right.

China's economic growth rate, structural adjustment success or failure, local government debt risk, current account balance, capital account opening prospects, inflation risk and other economic fundamentals will all affect the RMB to us dollar exchange rate trend.

Bets "foreseeable accident"

"We did that a few months ago."

Thompson said that China's economy is heading for a "soft landing" or "hard landing", although the extent and timing of the downturn are uncertain.

As early as April this year, Thompson said at a meeting of investors, "we have tried to prudently reduce any significant leverage risk that depends on the high growth rate of China's economy."

Thompson stressed, "not necessarily."

Broyhill Family Office, a Fortune Management Inc in North Carolina, is also shorting the renminbi.

Christopher Pavese, the chief investment officer of the company, wrote on the company's website in June 30th that it was not sure that the renminbi would depreciate, but it was much more likely to say it than Mr. Christopher Pavize thought.

"In publishing this article, the author is short selling the renminbi through traditional and derivative tools, even though the position is changing at any time."

The end of the article is stated.

The more influential force in the short queue is the Corriente Advisors LLC, a hedge fund from Texas.

This company is known for its reputation, and its chief investment officer, Mark Hart, founded the US sub debt crisis fund in 2006, and launched the European sovereign debt crisis fund in 2007, which has been successful in short selling and has been well received by Mark Hart.

"The complacency of market participants to China is horribly similar to the scenario before the US sub debt crisis and the European sovereign debt crisis."

Hart told investors in November last year.

He set up the China Opportunity Master Fund in an attempt to profit from the slowdown in China's economy.

An American Asset Management Co who understands the investment strategy of Corriente Advisors tells CIC new century reporter that this company is a financial event that underestimates the probability of market underwriting. Gambling can make a big profit. "They do not feel that the risk of RMB has been raised, but that the market has significantly underestimated the risk of RMB."

Pavize believes that China's debt driven speculative bubble may lead to devaluation of the renminbi as a "foreseeable accident".

What he calls "foreseeable accidents" has three characteristics: at least some people realize that there are problems; as time goes on, it will become more serious. Eventually, a crisis of great impact will be formed.

"Predicting the timing of such events is challenging and frustrating, but it does not mean that risks can be ignored," he said.

Pavize said that every investor is looking for investment opportunities in China and believes that China will maintain its current growth rate. When these people are wrong, what will happen to them? "At least it is worthwhile to take some insurance measures in the portfolio to hedge these assumptions, which are all the wrong risks."

More importantly, "taking insurance measures to hedge risks is almost free."

Pavize said.

One of the main tools for investment companies and hedge funds to short the renminbi is to buy Renminbi bearish options, mostly for one year.

A foreign trader in Hongkong, a European bank, has two indicators that can judge the extent of overseas shorting of the renminbi's behavior.

One is how much the hedge fund has bought, which is "hard to find"; the two is the price of the option.

In the early July, when the market was bought for one year, the US dollar to the RMB exchange rate was 1:7.0 bearer option, and the option of $1 million per denomination cost US $2200.

But four months or six months ago, it would only cost US $500 to $600.

An American hedge fund who is short of the renminbi also says that the price of RMB bearish options is almost 2 times that of a year ago. The price of such options is rising in the past few weeks, but it is still attractive.

Moreover, he believes that the rise in prices is precisely the sign that more people are paying attention to China's volatility.

The foreign exchange traders said that foreign investors had disregarded the depreciation of RMB in the foreign exchange market in the past, but now the situation is changing.

The attraction of the RMB bearish option is that it can hedge the risk of RMB depreciation and gain profits.

There are two ways to make profits, the first one is holding options, waiting for the depreciation of the renminbi. The second is that when the market fluctuates, the selling option is profitable at a higher price. "The risk lies in the lack of liquidity in the options market."

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Two shorting logic

Shorting the renminbi is mainly based on two logics, one is crisis theory, that is, because of the risks of real estate bubble and local government debt, the Chinese economy may be "hard landing". The central government will adopt a stimulus policy, and the depreciation of the RMB is one of them. Two, the theory of appreciation in place, that is, considering the high inflation and high housing prices and the reduction of trade surplus, the renminbi will soon appreciate or even be in place with the US dollar. If the central bank does not intervene, the market forces may devalue.

"Flies do not bite the seamless eggs".

Hedge funds are short of a country's currency because of possible economic fundamentals.

Pavize is very worried about China's government debt risk.

According to the data of local government debt released by the Audit Commission in June 27th, the proportion of local government debt to GDP increased from 17% to 27% in the past three years, and more than 60% invested in infrastructure, and nearly 1/4 of debt repayment depended on land revenue.

Seeing the data, Pavize is worried that when monetary conditions tighten and the global economy is more fragile, local credit default will grow rapidly once credit slows down and economic constraints are made.

Bienville Capital Management has been paying more attention to China's economy and RMB for more than 18 months.

Thompson told reporters in Caixin "new century" that shorting the renminbi is only one of the measures taken to prevent the risk of China's potential "hard landing" or "soft landing".

The problem of China's economy is "inflation in the short run. China's inflation is not only cyclical, it will restrict the flexibility of policy. In the medium term, the credit problem may arise, and its scale and severity will exceed the problems that have occurred before."

He stressed that the Chinese economy benefited from cheap loans, and once a large number of liquidity disappeared, the problem would appear, which would have a negative impact on the already fragile global economy.

Hart has been looking at Renminbi since last year.

In a meeting with investors last November, he pointed out that China's inappropriate low interest rates and artificially suppressed exchange rates pose a dangerous bubble in many areas such as real estate and bank credit.

However, some people believe that the logic of China's economic crisis leading to the depreciation of the renminbi is not necessarily logical.

"This logic does not understand the policy features of China. Even if the economy really hits a hard landing, it will not necessarily devalue the renminbi."

Wang Zhihao, director of Greater China research at Standard Chartered Bank, said that in response to the crisis in 2008, the central government had stimulated the economy through massive investment projects and increased export tax rebates, and did not use the devaluation tools of the renminbi, only to link the RMB back to the US dollar.

The Asset Management Co also reminds us that China's exchange rate policy is not necessarily synchronized with fiscal policy and monetary policy.

"First of all, I do not think China's economy will have a hard landing, even if it is hard landing, it will reflect a long cycle in the RMB exchange rate."

From the economic fundamentals, the second logic of empty renminbi is that the renminbi is approaching equilibrium valuation.

Since the reform in July 2005, the renminbi has appreciated nearly 22% against the US dollar.

China's trade imbalance has improved significantly, and the share of trade surplus in GDP has dropped from 7.5% in 2007 to about 3% in 2010.

A foreign exchange administration believes that in theory, the recent improvement of current account receipts and payments, especially the imbalance of trade balance, shows that there is no basis for substantial appreciation of the RMB exchange rate.

In view of the relative overvaluation of asset prices such as share prices and house prices, the RMB exchange rate may even depreciate.

In addition, inflation plays an increasingly important role in the adjustment of the RMB exchange rate.

In February 4th this year, the US Treasury issued a semi annual exchange rate policy report, pointing out that China's inflation rate is significantly higher than that of the United States, and the inflation adjusted RMB will appreciate faster, reaching a 10% appreciation rate.

The theory of appreciation in place has also been questioned.

Wang Zhihao believes that the trade surplus will increase in the second half of this year as imports will slow down and export trends will be good.

Even if capital account is gradually liberalized, there is no way to balance capital account within one or two days.

Therefore, "double surplus will continue, there will be pressure to appreciate."

In June, China's trade surplus was higher than expected to reach US $22 billion.

Where does the renminbi go?

Adam Kritzer, a researcher who tracks the foreign exchange market for more than 10 years, agrees that the economic base for the continued appreciation of the renminbi has been relatively weak. But he believes that this does not mean that the renminbi will not or should not continue to appreciate in.

"Investors' behavior is often irrational."

Speaking to reporters in Caixin new century, he said that in the next few years, China may have economic downturn or financial crisis, forcing foreign investors to stop betting on further appreciation of the renminbi.

But the reality is that foreign investors are still happy to ignore fundamentals and blindly invest large sums of money in Chinese projects to bet directly or indirectly on the appreciation of the renminbi.

The above Hongkong hedge funds also believe that from the perspective of purchasing power, it can be considered that the RMB is overvalued, but overestimation can not be the reason why it is empty.

Ren Yongli, managing director of BlueGold Capital Management LLP, a London based hedge fund, believes that the key consideration in answering the question whether the renminbi will depreciate is what China's policymakers may do for the renminbi exchange rate, Capital.

"The real impact of market pressure on the renminbi is not as big as other currencies."

Ren Yongli said that although the RMB has become more flexible, the policy impact on the exchange rate of the RMB against the US dollar is still a very important factor.

"The accumulation of foreign exchange reserves is still very fast.

This shows that the change in the renminbi against the US dollar is in the hands of policymakers rather than investors. "

A Chinese Research Director of the Washington Hedge Fund believes that the Central Bank of China can hold over $3 trillion in foreign exchange reserves to control the rise and fall of the renminbi. If there is pressure to depreciate, it can sell dollars to buy the renminbi.

In this regard, Thompson believes that people's reference to China's large-scale foreign exchange reserves is correct, but the risk is that such a large-scale liquidity may suddenly disappear.

Ren Yongli believes that as long as the Chinese government regards inflation as a more important priority than growth, the renminbi will continue to appreciate against the US dollar.

However, if the global economy slows down in the second half of the year and weakens the Chinese government's confidence in economic growth, it may see that the appreciation rate of RMB has slowed down.

The Chinese Research Director of the Washington Hedge Fund believes that even if China's economic slowdown is still much higher than that of the US and Europe, the rate of appreciation of the renminbi may slow down, but the direction will not change.

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However, some recent signals from market data indicate that the appreciation of the renminbi against the US dollar is expected to weaken, which deserves further attention.

In May, the one-year non deliverable forward foreign exchange (NDF) showed that the appreciation of the renminbi was expected to decline gradually.

The appreciation of the one-year NDF compared with the central parity of RMB against the US dollar fell from 3.02% in April 29th to 1% in July 19th.

At the same time, domestic RMB forward selling and foreign exchange (DF) and NDF prices continued to hang upside down.

Liu Dongliang, a financial analyst at the China Merchants Bank, said that the difference between DF and NDF is often more sensitive to the strength of the expected appreciation. Generally, the expected appreciation of overseas NDF is larger than that of DF, that is, the NDF value is less than DF. When NDF is greater than DF, it means that the appreciation expectation of overseas investors is weakened, and overseas investors are more sensitive to the expected change of exchange rate. Therefore, the upside down is worth paying attention to.

From historical data, since July 2005, the price reversal of DF and NDF has happened three times since the reform.

For the first time in the three quarter of 2008 to the first quarter of 2009, with the upside down, the RMB appreciated against the US dollar for two years, and the second appeared briefly in the two quarter of 2010. At that time, the regulators reiterated that the RMB would not appreciate at a time, the pre appreciation period of the market would be weakened, and the third price difference would be narrowed from May, or there would be an upside down.

Liu Dongliang believes that the trend of narrowing of China's trade surplus, the erosion of high inflation to the appreciation space, the narrowing of arbitrage space and the cooling of the macro-economy and other factors have made the RMB appreciation against the US dollar come to an end. In the next six months, the value of the renminbi will probably continue, but after half a year, the RMB will probably end its unilateral appreciation stage and enter a two-way fluctuation or even a stage depreciation.

In addition, the latest foreign exchange reserves data show that in the last two months of the first half of this year, the growth of foreign exchange reserves dropped sharply.

The two quarter increased 152 billion 800 million yuan in foreign exchange reserves, down 22.56% from the first quarter.

Especially in May and June, the new foreign exchange reserves were only 20 billion 200 million US dollars and 31 billion 500 million US dollars respectively, and the trade surplus in that month was 13 billion 100 million US dollars and US $22 billion 300 million respectively. If we consider foreign direct investment (FDI), capital inflow slows down or even outflows in the last two months.