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• China’s economy is struggling with problems
• Hedge fund manager bets on strong yuan slump
• Most market participants remain optimistic
There are some investors who are pessimistic about China. Especially since the Chinese real estate industry has entered its current crisis, there has been a growing number of voices fearing that the yuan will ultimately suffer as Beijing has to print money to help the country’s banks, which are now sitting on a mountain of bad loans, to rescue.
But Crescat Capital’s Kevin Smith has invested up to 10 percent of his $136 million macro fund in options that bet against the Chinese currency since 2014, according to Bloomberg, with mixed success. But the expected big slump has never happened. However, Smith thinks now may be his time.
Real estate crisis in China
There are currently several reasons that give Smith hope. Firstly, the success story of the Chinese real estate market came to an abrupt end after years of boom. The Chinese government capped lending to real estate developers in order to limit financial risks. These regulatory restrictions in the lending business have led to massive liquidity bottlenecks in the industry. The best-known victim is the industry giant Evergrande, which was only just able to avoid bankruptcy.
Chinese central bank lowers key interest rate
In addition, China’s economy is struggling with the consequences of Beijing’s tough zero-COVID policy. Partly as a result of the lockdowns, GDP only increased by 0.4 percent in the second quarter, although the government is actually aiming for 5.5 percent growth for the year as a whole. In the meantime, the number of market observers who believe that this proclaimed growth target cannot be maintained is growing.
Even China’s head of government, Li Keqiang, declared in mid-August that the economy had to fight “shocks beyond expectations”. Dealing with the pandemic must be “effectively” coordinated with economic and social development “to ensure effective COVID-19 containment, economic stability and safe development.”
The People’s Bank of China has eased monetary policy to help the ailing economy. At the end of August, the key rate for one-year loans (LPR) was reduced by five basis points and the key rate for five-year loans by 15 basis points. On the other hand, since the central banks around the world are raising their key interest rates, it is becoming more attractive for investors to shift their money abroad. Investors have already withdrawn a record amount from China’s bond market this year as a result of the widening spread between interest rates, according to Bloomberg.
As the news portal further reports, the Chinese currency has already depreciated by eight percent against the US dollar over the course of the year as a result of these factors. The yuan is thus on track to suffer its sharpest depreciation in full-year 2022 since 1994. This could be just the beginning, according to Smith.
“China is currently going through a financial crisis, which I think is even more severe than the global financial crisis in the US,” said the 58-year-old in an interview. “For us, the game is in currency.”
But despite the numerous problems in the Middle Kingdom, Kevin Smith with his bearish attitude is still a minority, according to “Bloomberg”. For example, UBS experts consider China’s large savings, high mortgage payments and strong state bank controls “unlikely to lead to a typical debt or financial crisis with uncontrolled credit crunch, major bank failures and a significant devaluation”.
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