Tag Archives: yuan

Time To Jump On The Band Wagon And Put On Some Asia Trades

Various Hedge Funds Shorting China It probably all started with George Soros’s comments during the World Economic Forum meeting in Davos, Switzerland. Where he said a hard landing for the Chinese economy was inevitable and he was, therefore, betting against Asian currencies as a result. Since then, reports are surfacing of various Hedge Funds taking on the powerful Chinese government in plays against its stocks and currency. Kyle Bass’s Hayman Capital sold most of its other investments to concentrate its exposure to China. It is 85% invested in shorting Asian currencies, including the Yuan and Hong Kong Dollar. They are playing a long term bet with a return horizon stretching 3 years. Greenlight Capital Inc. has options on the Yuan heading south and billionaire trader Stanley Druckenmiller and hedge fund manager David Tepper also have short positions against the Renminbi. Other Hedge funds mentioned by the WSJ as being short include the Carlye Group, Scoggin Capital, and ESG Short China Fund. This is happening at a time when the Chinese government is showing concerns for a Soft landing and taking on this government could prove risky as it has the largest foreign reserve holding worldwide at $3.9 trillion. The situation in China The markets at home have not had a great start to the year and economic data has not been as strong as forecast previously. Latest NFP figures came out much lower than expected and attention has been focusing on China being the catalyst as fear of a global recession begins to build. The economic slowdown in China has been gaining speed, the last two GDP growth figures were both lower than previous at 6.9% and 6.8%. The PMI index for manufacturing is currently at 48.4 and has been below 50 since July last year. Levels below 50 indicate a contracting economy. But the biggest concern for investors is that the contraction may be larger than the government controlled statistics office is actually reporting . The Chinese currency was selected by the IMF as a Reserve currency last November 30th; this was due mainly to its widespread use in international trade. The effect of the Yuan joining the select club of reserve currencies still remains to be seen but initially, it has had little impact. Capital outflows for the last quarter were down by $843 billion HML, although the average capital flow from 1998 to 2015 has been a negative $325.54 billion HML, we are still considerably low and capital flows have not been more negative since 2008. Click to enlarge Last January 12th, there was a run on Yuan short trades in Honk Kong forcing the overnight lending rate, to finance short positions, up to 66% nearly 10 times the normal rate, which fell back down to 8% the next day. Despite the firepower of the Chinese government, there are still limits to what it can do and for how long it can sustain any intervention. How to play the market It’s not easy to short sell Chinese stocks; foreign investment in Chinese A shares is not even permitted. However, you can gain exposure to Chinese equity through a number of ETFs. Each ETF tends to focus on different segments of shares. SPDR S&P 500 (NYSEARCA: GXC ) is the most comprehensive, but iShares China Large-Cap (NYSEARCA: FXI ) is the largest and most traded fund, with $4.65 billion AUM. The Yuan is fairly accessible through most online brokers and so is the Hong Kong Dollar. If futures are the preferred vehicle, then the CME also quotes USD/CNH futures. Contract size like the other FX futures is $100,000 which may be large but margins are low at CNH 15,000 for front contracts and CNH 16,100 for back-end contracts. Futures allow you to hedge your Long contract by selling another contract month. For choice, I would prefer being long the back-end and short the front. As my view is that long-term Asian currencies will depreciate but short term, they may bounce back up. If your online broker has access to the Honk Kong exchange (HKEx) then you could still gain exposure to the Chinese stock market with the use of futures. The exchange offers various indices; my choice would be for the Hang Seng Index Futures HSI, tick value is HK$50. Or MHI, the mini Hang Seng Index which has a tick value of HK$10. If you really want to gain exposure to the mainland and corporations operating there, then you should go for the CES China 120 Index. If the slowdown in the economy continues, then the Chinese government will also probably lower interest rates in an attempt to spur the economy. The government has already cut interest rates 5 times since the beginning of 2015. The Hong Kong exchange quotes 3-month HIBOR HB3 and 1 month HIBOR HB1. For choice, I would prefer buying the 3-month contract as it should feel any interest rate cut in a greater way. The notional size of this contract is HK$5,000,000 and one tick equals HK$125.00, initial margin is HK$1,820. Click to enlarge Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: How does that look now? Thanks.

IMF Green Signal Put Yuan ETFs In Focus

The Chinese economy is telling us two different stories at a time. While on one hand, the economy is persistently delivering offhand economic numbers, and even raised hard landing fears at some point of time, on the other, its currency – yuan – received a privileged reserve status from the International Monetary Fund (IMF) recently. Notably, the inclusion of the yuan in the IMF’s reserve currency list gives the economy a cream-of-the-crop class, as this emerging currency will now sit beside the developed currencies like the U.S. dollar, pound, euro and yen. Also, the IMF nod indicates economic stability in China. The IMF’s executive board, which represents the fund’s 188 member nations, recently settled on the fact that the yuan now enjoys a “freely usable” status. The move marked the first change in the SDR’s currency portfolio since 1999, per Bloomberg . Not only this, China’s currency will have a weight of 10.92%, higher than that of the yen (8.33%) and the pound (8.09%), but lower than the euro (37.4%) and the U.S. dollar (41.9%) weight. The move will take effect in October 2016. Why the Move? Though several theories are doing rounds right now, both positive and negative, the IMF viewed it as the consequence of reformative measures presently being undertaken in China. However, one school of analysts addressed the decision as “political,” and is not counting on the easy accessibility of the currency, because the yuan cannot be transferred into other currencies without restrictions. The believer of this school also indicated that the IMF head “realized how bad things are in China, so what she (Christine Lagarde) decided to do was to throw China a lifeline.” This way, the IMF boss can press the Chinese government to launch a total convertibility for its currency. Notably, the Chinese economy is on its way to deliver a 25-year low expansion this year. Despite the roll-out of a flurry of measures, the economy has showed no signs of a steady recovery, and the financial markets remained highly volatile due to extreme risk-taking. Investors should also note that movements in the yuan market have been rampant this year. In August, China’s central bank devalued the currency by 2%, following which yuan posted the largest single-day decline since the historical devaluation in 1994, after the country arranged its official and market rates in a line. Notably, the Chinese authorities follow a trading band around the official reference rate it sets each day for the value of the yuan against the dollar. The Chinese government announced in August that the renminbi’s central parity rate would follow the previous day’s closing spot rates more closely going forward. This indicates China’s intent to make its currency more market-driven. As a result, a section of analysts believe that the actual motive behind this currency move was to prepare the yuan as a reserve currency. Most importantly, the Chinese central bank assured the market that it would promptly intervene in the currency market if depreciation crosses the 3% mark. Busy Trading in Yuan The yuan became the fifth-most active currency for global payments by value in October, with a market share of 1.92%, per the global transaction services organization SWIFT . Not only this, the Chinese currency beat the Hong Kong dollar and the U.S. dollar for payments between Japan and China/Hong Kong in October. Standard Chartered and AXA Insurance estimate that the IMF’s green signal will offer the yuan a minimum of $1 trillion of movement. Needless to say, this historic move makes it important to look at the Chinese yuan ETFs. WisdomTree Chinese Yuan ETF (NYSEARCA: CYB ) The most popular Chinese yuan fund is CYB from WisdomTree. The product invests in short-term, investment-grade instruments in order to be reflective of both money market rates in China available to foreign investors and changes in the value of the yuan against the dollar. The product charges investors 45 basis points a year, but sees decent average volumes of 50,000 shares a day on AUM of over $64.4 million. The fund currently has a Zacks ETF Rank #3 (Hold) with a Low risk outlook. It is down over 1.2% so far this year (as of December 1, 2015). Market Vectors Chinese Renminbi/USD ETN (NYSEARCA: CNY ) For investors seeking an ETN way to target the Chinese currency, CNY is the right option. This product tracks the S&P Chinese Renminbi Total Return Index, which looks to track the performance of the Chinese currency against the U.S. dollar, by rolling three-month non-deliverable currency forward contracts. The fee is a bit higher at 55 basis points a year, while volume comes in below 5,000 shares a day, suggesting a wide bid-ask spread and ever-increasing total costs. The product is down 0.6% so far this year. The ETN currently has a Zacks ETF Rank #3. CurrencyShares Chinese Renminbi Trust ETF (NYSEARCA: FXCH ) This product looks to track the price of the Chinese renminbi net of Trust expenses. The product has amassed about $7.7 million in assets, while it sees weak volumes of around 1,000 shares a day, suggesting a wide bid-ask spread. On the positive side, the ETF has the lowest expense ratio at just 40 basis points a year in the Chinese currency ETF space. The fund has lost 2.7% this year and carries a Zacks ETF Rank #3. Original Post