Tag Archives: yuan versus dollar

The Nuclear Option: Chopping off Hong Kong from the Dollar System

China and America have begun the fraught business of disentangling their financial systems. Chinese firms with shares listed in New York have rushed to float in Hong Kong, too, after the White House signalled they are not welcome on Wall Street….But now Hong Kong itself, the world’s third-biggest international financial centre, has become a geopolitical flashpoint. Its unique role as the conduit between global capital markets and China’s inward-looking financial system means that both sides must tread carefully.

On May 28, 2020 China said it would enact a new national-security law for Hong Kong, undermining the formulation of “one country, two systems” in place since 1997, under which the territory is supposed to be governed until 2047. In response, America has said it may downgrade the legal privileges it grants Hong Kong, which treat it as autonomous from China

Hong Kong’s place in the world depends on having the rule of law, a trusted reputation and seamless access to Western financial markets. Other Chinese cities have big stock exchanges: shares listed in Shanghai and Shenzhen are together worth a lot more than those in Hong Kong. But neither has fair courts, an independent central bank, free movement of capital or a mix of Western and Chinese firms. These foundations are the basis for $9.7trn of cross-border financial claims, such as loans, that are booked in the territory. Hong Kong is also where mainland Chinese firms and banks go to deal in the dollar, the world’s dominant currency. Some $10trn of dollar transactions flowed through Hong Kong’s bank-to-bank payments system last year.

Until recently, conventional wisdom held that Hong Kong’s position would be assured for 20-30 years, because it would take that long for China either to upgrade its markets to Western standards or to become so powerful that it could impose mainland practices, and the yuan, on the rest of the world. But the trade war, a year of street protests and China’s iron-fisted response to them raise new questions about Hong Kong’s durability. Bullying from Beijing erodes the sense that it is autonomous. And there is an outside chance that America could impose sanctions or other restrictions that would stop some Hong Kong officials, firms or banks from using dollars….. America’s might bring into question whether money parked in Hong Kong is still fully fungible with money in the global financial system. If these worries spread, they could destabilise Hong Kong and cause a financial shock in China and well beyond it.

The good news is that so far there is no sign of capital flight. Hong Kong’s vast deposit base has been stable in recent weeks, say its bankers. Investors are reassured by its $440bn or so mountain of foreign reserves and a long record of capable financial management. The rush of Chinese listings will bring in new cash and drum up business in the city….Nonetheless, for China the prudent policy is to try to speed up the development of the mainland’s financial capabilities so that it is less exposed to potential American punishment…Italso means another big push to boost the global role of the yuan and reduce China’s dependence on the dollar…

Excerpts from Hong Kong: Conduit’s End, Economist, June 6, 2020

Currency Wars: the Yuan

A handful of mainly U.S.-based macro hedge funds have led bets against China’s yuan since late last year (2015) and the coming weeks should tell how right they are in predicting a devaluation of between 20 and 50 percent. Texas-based Corriente Partners… [bets against the yuan].The firm reckons rush by domestic savers and businesses to withdraw money from China will prove too strong for authorities to resist and control, even with $3.3 trillion in FX reserves, the biggest ever accumulated.  London-based Omni Macro Fund has been betting against the yuan since the start of 2014. Several London-based traders said U.S. funds, including the $4.6 billion Moore Capital Macro Fund, have also swung behind the move.  Data from Citi, meanwhile, shows leveraged funds have taken money off the table since offshore rates hit 6.76 yuan per dollar three weeks ago…

That has prompted comparisons with the victories of George Soros-led funds over European governments in the early 1990s. Chinese state media on Tuesday warned Soros and other “vicious” speculators against betting on yuan falls.

“China has an opportunity now to allow a very sharp devaluation. The wise move would be to do it quickly,” Corriente chief Mark Hart said on Real Vision TV this month.”If they wait to see if things change, they will be doing it increasingly from a position of weakness. That’s how you invite the speculators. Every month that they hemorrhage cash, people look at it and say, ‘well now if they weren’t able to defend the currency last month, now they’re even weaker’.”

“It’s a popular trade. I can’t imagine a single western hedge fund has got short dollar-(yuan),” Omni’s Chris Morrison said.Derivatives traders say large bets have been placed in the options market on the yuan reaching 8.0 per dollar and data shows a raft of strikes between 7.20 and 7.60. The big division is over pace and scale.  Corriente and Omni both say if China continues to resist, it may be forced this year into a large one-off devaluation as reserves dwindle….

China’s response to yuan pressure has underlined a difference with earlier currency crises: Beijing has an offshore market separate from “onshore” China into which it can pump up interest rates at minimal harm to the mainland economy.  Earlier this month, it raised offshore interest rates, making it prohibitively expensive for funds to leverage overnight positions against the yuan. That sent many reaching for China proxies, including for the first time in years, the Hong Kong dollar.“We have a direct position in the (yuan) but it’s much easier to trade second-round effects of China,” said Mark Farrington, portfolio manager with Macro Currency Group in London. “The Korean won, Malaysia, Taiwan, are all easier plays.” … [Hedge funds] say Beijing may have spent another $200 billion of its reserves in January 2015; at that rate, most of its war chest would evaporate this year and the yuan weaken by a further 18-20 percent. Omni’s Morrison states “That is a fundamental misconception [to believe that Chinese authorities control the yuan]. They’re not making the tide, they’re just desperately holding it back.”

Excerpts from PATRICK GRAHAM, Hedge funds betting against China eye ‘Soros moment, Reuters, Jan. 26, 2016