Yuan bears defeat, it isn’t worth fighting China’s PBOC

Vidya Ranganathan –

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 US 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 yuan has risen 2 per cent 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 per cent in 2016 and 4.5 per cent in 2015.
Concern about the decline led the central bank to spend a trillion dollars over 2-1/2-years to defend the yuan.
Short yuan positions are expensive.
It costs about 5 per cent 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.
Beijing is also keen on keeping the yuan strong so that US 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 US 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.  — Reuters