A hedgie from Texas is betting big time against the yuan Dealbook reported:
BETTING ON FURTHER DEVALUATION OF RENMINBI Mark L. Hart III, a hedge fund investor based in Texas, has made high-risk, high-return wagers that the United States housing market would collapse and that Greece would go bankrupt. His most audacious gamble to date might be his bet on a 50 percent currency implosion in China, Landon Thomas Jr. reports in DealBook.
He predicts that the extreme drop will come when foreign investors pull their money out of China, propelling a broader rout in emerging market currencies and bringing on a sustained global slump.
And he is not the only one. An increasing number of investors think thetrillions of dollars that went into risky investment opportunitiesin countries like China, Brazil and Turkey are quickly leaving. They think the pace will pick up when the Federal Reserve eventually raises interest rates, leading to plunges in currencies, corporate defaults and a global slowdown.
John H. Burbank III, a longtime emerging-market investor at Passport Capital, a $4 billion hedge fund in San Francisco, has earned stellar returns this year betting on weak commodities, and imploding emerging markets and currencies.
At the root of these investment strategies is the belief that China’s 3 percent currency devaluation was not a one-time event.
These investors think China is experiencing a run on the bank, similar to what happened to Asian countries in 1997 when their semi-pegged currencies collapsed. They also think the country’s $3.5 trillion of foreign exchange reserves will not be enough to prevent a large-scale rout.
In the first quarter of this year, $109 billion left Chinese banks for overseas institutions, according to the Bank for International Settlements, a clearinghouse for global central banks.
China has been at the forefront of the so-called carry trade, in which corporations and countries tap dollar-based lenders and invest the proceeds in higher-yielding assets denominated in local currencies, like real estate, commodities and large-scale investments. As long as interest rates in the United States remain low and emerging-market currencies remain strong, these trades have been highly profitable.
Mr. Hart calculates that the size of the Chinese carry trade is around $2 trillion and as he sees it, the dollars that have flowed into China must flow out again.
China’s foreign currency reserve ratio – in effect its net cash available to defend against speculators – is just a bit over 20 percent, putting it in the neighborhood of countries known to be vulnerable to capital outflows, like Brazil, Turkey and South Africa.
“If there is a run on the currency, everyone will want to turn their yuan into dollars,” said Jurgen Odenius, the chief economist of Prudential Fixed Income. Yuan is a shorthand reference to China’s currency, the renminbi. “And on that basis, China’s foreign exchange reserves do not rank among the stronger countries.”
Still, it is not certain that Mr. Hart’s bet will pay off. The Federal Reserve’s reluctance to increase interest rates could weaken the dollar and take the pressure off China and other emerging-market currencies.