Hedge funds betting big against Chinese currency, says WSJ

BEIJING • Several major hedge funds are piling into bets that the Chinese yuan will decline against the US dollar, the Wall Street Journal (WSJ) reported yesterday.

The bets reflect the multitude of pressures on the Chinese currency, including a slowing economy, unsteady financial markets and persistent capital outflows that have diminished the country's formidable foreign reserves.

Hayman Capital Management, which bet against the US housing market years ago, has invested about 85 per cent of its portfolio in bets against the yuan and the Hong Kong dollar, WSJ said.

Investing guru David Einhorn's Greenlight Capital also holds options that pay off if the yuan falls, as do hedge fund managers Stanley Druckenmiller and David Tepper, WSJ reported, citing people familiar with the matter.

Chinese officials have sought to allay fears of a weakening currency, saying they intend to keep the exchange rate stable and that wagers against the yuan will fail. State media warned speculators, including billionaire investor George Soros who said he was shorting Asian currencies, not to short-sell the yuan.

China's attempt to starve the offshore market of funds while flooding domestic banks with cash to support the economy has fallen short, with the cost of betting against the yuan in Hong Kong yesterday falling back to where it was at the start of the year.

"The only way to truly deter speculators would be to let onshore interest rates rise sharply, but they cannot do this as it would further depress the Chinese economy," said Mr Chris Morrison, who heads strategy at hedge fund Omni Partners, and has predicted the yuan could fall about 15 per cent this year.

"It will be too difficult for them to drive a permanent and high wedge between offshore and onshore interest rates."

Yuan borrowing costs in Hong Kong, the biggest centre for offshore financing in the currency, surged to records across all tenors earlier in January as China's central bank bought the currency after it weakened to a five-year low.

That drained supplies in the market and made it more expensive to borrow for short trades, selling borrowed assets in the currency with the aim of profiting by buying them back at lower prices later.

The Hong Kong InterBank Offered Rate for three-month yuan loans fell to 4.87 per cent last week, 59 basis points lower than the fixing on Dec 31, and down from a record 10.42 per cent in January. The overnight rate had surged to an all-time high of 66.8 per cent on Jan 12, and was at 1.1 per cent yesterday. 

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on February 02, 2016, with the headline 'Hedge funds betting big against Chinese currency, says WSJ'. Print Edition | Subscribe