BEIJING • The battle over the fate of China's currency is starting to get bloody for the bears.
Seven months after a shock devaluation spurred hedge funds and other speculators to wager on further declines, the yuan's unexpected resilience has turned many of those bets into losers.
At least US$562 million (S$773 million) of options that pay out if the currency drops below 6.6 per US dollar - its weakest point since the devaluation - have expired worthless since August. Another US$807 million will lapse within three months.
While those figures provide just a glimpse into the potential losses for pessimistic speculators, it shows that the Chinese government has proven a stronger adversary than many traders anticipated.
Policymakers have gone to extreme lengths to prop up the yuan - ramping up intervention, clamping down on capital outflows and waging a rare verbal campaign to restore confidence in the currency.
Bears now face a difficult choice: They can abandon the trade, or hunker down for what could become a costly waiting game.
"China wants to have control over the yuan and will do whatever it can to ensure that no one else decides what direction it goes in," said Notz Stucki & Cie's head of alternative investments Hilmi Unver. "Is it worth fighting against a huge economy and policymaker that could take you out? No."
State-run banks have repeatedly intervened to prop up the yuan since August, while the authorities have suspended quotas for outbound investment and restricted overseas debit card transactions to limit capital outflows.
People's Bank of China governor Zhou Xiaochuan has joined a slew of top policymakers to talk up the currency, saying over the weekend that the yuan has returned to a more "normal, rational and fundamentals-driven" trend.
Their efforts have paid off so far. After the worst start to a year in two decades, the yuan has strengthened 1.6 per cent since Jan 7. It traded at 6.493 per US dollar on Friday, the strongest close of 2016, and was little changed in Shanghai yesterday.
Betting against the Chinese currency became such a popular trade among hedge funds earlier this year that billionaire investor Bill Gross compared it to the speculative attack on Britain's pound in 1992.
The case for depreciation has not gone away. China's economy, which grew at the slowest pace since 1990 last year, still faces headwinds, as evidenced by a 25 per cent plunge in exports last month and industrial production data over the weekend that trailed estimates.
The country's currency reserves have shrunk by more than US$790 billion since June 2014, while record debt levels have fanned concern that the financial system is primed for a crisis.
The currency could also face renewed selling pressure once the US Federal Reserve decides to raise borrowing costs again. Easing concern over an imminent rate increase has been a major contributor to the yuan's strength against the greenback in recent weeks.
"The reality is that the yuan is overvalued against the dollar," said Royal Bank of Canada's head of Asian foreign-exchange strategy in Hong Kong Sue Trinh, who sees the currency weakening to 7.1 versus the US dollar in the next 12 months.
Bears should not underestimate the government's fire power, said Mr Charlie Chan, founder of Splendid Asia Macro hedge fund in Singapore. Even after recent declines, China's US$3.2 trillion stockpile of foreign exchange reserves is almost three times bigger than that of any other country.
Some pessimists are sticking with it. Mr Adam Rodman, a hedge fund manager at Segra Capital Management in Texas, said he is holding on to wagers against the yuan, even after marking down the value of his positions last month.
"We haven't pared down exposure," Mr Rodman said. Segra, which bought options in November, has not lost money on the trade and still expects the currency to weaken in the next 18 months, he said.