Yuan Bears Slowly Becoming Extinct

China Burns Hedge Funds as $562 Million Yuan Bet Turns Worthless.” Those who are still holding onto their positions are very unlikely to see different fortunes.

Aside from China’s often-discussed massive trade surplus and its government officials’ extreme willingness to keep the currency stable, there’s another important point that RMB (yuan) bears seem to be missing.  While many are pointing to China’s declining reserves, China doesn’t need its foreign reserves to last month after month as they have over the past year.  It only needs enough to force margin calls and position closes for those putting downward pressure on the RMB with their bets.  They could pull it off in a day/week!  (Remember what to they did to the HIBOR in January.)

Plus, hopes among RMB bears that a debt crisis will erupt are misguided; the lion’s share of that debt is internal and RMB-denominated.  For internal loans, the national government can facilitate swaps as it has in the past to turn loans into longer dated bonds—a goal consistent with its efforts to shift financing away from bank loans and toward capital markets.  Additionally, dollar outflows will slow as companies finish their bout of paying off their limited external debt ahead of schedule.

Another missed issue is that the recent opening of the government bond market to foreign institutional investors combined with China’s goal of expanding its fiscal deficit this year will likely improve RMB demand as the government yields will look attractive.  Yes, the currency will likely weaken some (at least in the short-term), but the remaining RMB bears with positions that indicate expectations of a massive devaluation are increasingly unlikely to get their pay day.

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