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Yuan For The Money...

 -- Published: Tuesday, 25 November 2014 | Print  | Disqus 

By Harris Kupperman

So, I’m chatting with my good friend “Man in Black” and he lets me in on a bit of a chart secret; the Chinese Renminbi (CNY) is starting to look awfully similar to the Japanese Yen (JPY) right before it put in a massive move. Long time readers will recall that after stalking it for a few months, I captured the inflection point in the JPY and rode it to very sizable gains. Is it time to start hunting for an inflection in CNY?


Current Renminbi Chart

JPY Before

JPY Before The Big Move

JPY After

White Vertical Line Shows Where AIC Published Short Yen Piece

Now, I’m not a chart guy, but I can certainly see the similarities between the two charts. It looks like CNY is re-testing the bearish wedge that it broke out of in early 2014. However, for me to get involved in a macro theme, I need to first have a fundamental reason for why the trend is interesting. Only then, do I rely on my friends with the charts to tell me when to play.

From a fundamental standpoint, there are two reasons to think that China may see a weaker CNY. To start with, they cannot be happy to have Japan, their largest trading partner, devalue the JPY against the CNY by 62% over the past three years. While China talks a big game about creating a domestic consumer economy, for now, it is still very much an exporter and the decline in the JPY must be putting a strain on certain industries. Incidentally, this isn’t happening in a vacuum—over the past few months, the Koreans have starting to see their Won weaken and now the Euro is joining in. In a trade war, can China sit by and let everyone else devalue—or will they be forced to play catch up?



The bigger issue is that the Chinese economy is clearly slowing. Even worse, the past few years of GDP growth have increasingly been created by an epic debt bubble. While no one has a clear picture of the size of this bubble, it is obvious that a decent chunk of this money was used for property speculation, lent to shaky businesses or simply laundered out of China—often with a combination of all three. Meanwhile, many less creditworthy borrowers have been forced into the unofficial “shadow banking” market, while larger firms have used specially created trust products to sidestep banking regulations. None of this is a secret, the question was always when, not if, it would all blow up.

The thing about a debt bubble is that as long as more money is lent, the bubble can continue to grow. There are now signs that this debt bubble is becoming increasingly unstable. The recent unscheduled move by the Bank of China to lower interest rates on Friday, gives further credence to the view that something is amiss. Clearly, the PBOC is scared of something. Maybe it has something to do with last week’s bankruptcy of Haixin Steel & Iron, China’s largest bankruptcy to date. Many China watchers anticipate additional bankruptcies.

Finally, while I am always skeptical of government data, especially when it comes from China, it seems as though the Central Bank is no longer intervening to suppress the Renminbi. In fact, foreign exchange reserves are actually declining. While a few months of data does not create a trend, it certainly is an interesting development to watch.

China Fx Holdings

Chinese Foreign Exchange Reserves

A combination of too much debt, a structural shift from an export economy to a consumer economy, the central bank entering a period of stimulus, a change in currency flows and a trade war amongst China’s largest trading partners are all suddenly starting to matter. There are plenty of reasons to be bearish on the CNY, especially with many leveraged carry traders still positioned long as they expect the CNY to continue to appreciate—remember all those US senators who were convinced that the CNY was 30% to 50% undervalued?

For the first time ever, I’m short CNY. This doesn’t mean that I’m bearish on China. Despite a massive misallocation of capital over the past decade, I believe that China will muddle through its problems, suffer some pain and be better for it—however; it might not be with CNY sporting a six handle. 

Disclosure: Short Renminbi. This isn't a recommendation to buy or sell securities and currencies or make cliched jokes using Yuan in a headline. Accounts that I manage may buy or sell securities without further notice.

Harris Kupperman

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 -- Published: Tuesday, 25 November 2014 | E-Mail  | Print  | Source:

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