
Currency War: U.S. Hedge Funds Mount New Attacks on China's Yuan - yulunli
http://www.wsj.com/articles/currency-war-u-s-hedge-funds-mount-new-attacks-on-chinas-yuan-1454236202
======
mahranch
China's economic growth simply isn't sustainable, and that's even if it was
true growth. There isn't a top economist alive who believes China's self-
reported GDP numbers aren't fudged in one way or another (source:
[http://www.businessinsider.com/economist-reactions-to-
chinas...](http://www.businessinsider.com/economist-reactions-to-
chinas-q3-gdp-results-2015-10?r=UK&IR=T)). Either one of those situations (an
economic slowdown, China fudging the numbers, or the more likely situation: a
combination of both) makes hedging against the Yuan a pretty solid bet.

People and foolish investors think, "Well, China has more than a billion
people so it will eventually have a robust and rich economy!" Only, it doesn't
work like that (cue the "That's not how this works. That's not how any of this
works" lady). Population size is only a tiny facet of a much larger picture.
And it's not even a particularly important one, relatively speaking. There are
some economists who are now starting to think that having a massive population
size may have the opposite effect; it helps you reach a certain point but then
your massive size begins to act as an anchor which keeps you from growing
further.

~~~
tim333
>China's economic growth simply isn't sustainable, and that's even if it was
true growth

People have been naysaying China for a while but it's kept merrily growing.
Mostly it's because the Chinese tend culturally to be pro education and hard
working but in China were reduced to very low incomes by Mao's communism and
have since been recovering and getting back towards the kind of economy they
have in Taiwan, Hong Kong, Singapore and the like.

GDP per capita in China is $6,800 (up from $951 in 2000) against $32k in
Taiwan and $55k in Singapore so there's a way to go. A housing crash will
probably just be a blip for a while. They'd have to turn back to Mao to really
muck things up.

~~~
sharetea
Yup China grew......by borrowing 32Trillion
[http://www.businessinsider.com/china-debt-to-gdp-
statistics-...](http://www.businessinsider.com/china-debt-to-gdp-
statistics-2016-1?r=UK&IR=T) in order to support dead state companies
[http://www.dailymail.co.uk/news/peoplesdaily/article-3422491...](http://www.dailymail.co.uk/news/peoplesdaily/article-3422491/Inside-
China-s-zombie-factories-Grim-pictures-bustling-steel-plants-completely-
abandoned-nationwide-slashing-production.html) and build empty cities and
buildings
[http://www.chinatopix.com/articles/75493/20160126/shanghais-...](http://www.chinatopix.com/articles/75493/20160126/shanghais-
pentagon-style-shopping-mall-today-chinas-largest-empty-building.htm)
[http://www.citymetric.com/skylines/enough-empty-floor-
space-...](http://www.citymetric.com/skylines/enough-empty-floor-space-cover-
madrid-so-why-are-chinas-ghost-cities-still-unoccupied-1180). Now they have to
layoff tons of steel/cement/coal workers, around 400,000 to start
[http://www.bloomberg.com/news/articles/2016-01-26/china-
stee...](http://www.bloomberg.com/news/articles/2016-01-26/china-steel-cut-
plan-risks-400-000-jobs-instability-institute), and 300,000 soldiers.

Ironically, these unemployed million of disgruntled workers will not move into
the empty buildings in the city; They'll most likely move back to the
countryside. They will, however, be back in the city for protesting.

~~~
adventured
It's bizarre that you're getting downvoted. The sole reason China's economy
kept - supposedly - growing so quickly after the great recession was due to
the extreme amount of debt they took on.

China took on the greatest pile of debt in world history in the shortest
amount of time. Nothing like it has ever been seen before. They're now
arguably the most indebted nation when you combine public + private debt, and
it continues to expand. They have no way to reduce that debt, as the moment
they take their foot off the debt gas their economy will crash, and yet their
new debt is generating almost no growth return. They're bleeding reserves,
they're overflowing with zombie corporations, their asset classes keep trying
to implode and require constant large bailouts, and they still have nearly a
billion poor people to deal with and half a billion pretend farmers without
jobs. How could they be more of a disaster?

------
GreaterFool
Isn't everyone and their dog trying to devalue their currency these days to
boost exports? What's the problem with weak yuan? Sure, iPhones will get even
more expensive to buy in China (rather funny since they are made there) but
other than that it should be a boon to exports, no?

~~~
ryandamm
The main problem is a devalued currency stokes inflation, so consumer costs go
up (so do producer costs, but that's offset by better export earnings).

China is in the middle of a shift from an export-driven economy to a
consumption-driven economy, part of the normal development arc of major
economies. But increasing export profits at the expense of households pushes
that balance in the wrong direction.

For more (much more!) detail on this, I highly suggest the blog 'China
Financial Times' by Peking University professor Michael Pettis: mpettis.com.

But generally, yes: the world has a savings glut, and devaluing your currency
helps export your domestic weakness (some economists call devaluation
'exporting your unemployment'). China is in a rather unique situation though.

~~~
bcg1
$57 trillion in world debt is something quite unlike a savings glut. And that
is just public debt, and it is growing quickly.

[http://www.economist.com/content/global_debt_clock](http://www.economist.com/content/global_debt_clock)

But in general I agree with your overall statement... everyone talks about
China's "ghost cities" as if they are some sort of quixotic or keynesian
tomfoolery... but a simpler explanation is simply that China wants to urbanize
and grow a middle class as part of the development cycle you mentioned. They
probably need a "hard landing" in order to cool off their real estate market
and clear out the dead wood of their malinvestment in order to realize that
goal.

~~~
lkrubner
"$57 trillion in world debt is something quite unlike a savings glut"

That's also $57 trillion in savings. You do realize that someone owns the $57
trillion in debt, right? From the point of view of the owners, that is $57
trillion in savings. If you think debt is all bad, then you are not thinking
coherently.

~~~
jld89
Nope... not necessarily. Not when hedge funds and speculative parts of banks
create virtual imaginary money. Modern capitalism is _NOT_ a zero sum game.

It may be logical yes but it's not how it works right now. It's how it worked
when the gold standard was around...

I wish it was a zero sum game, but it's not.

------
melling
Will this be a replay of Soros "Breaking the Bank of England"?

[http://dealbook.nytimes.com/2010/06/04/when-soros-decided-
to...](http://dealbook.nytimes.com/2010/06/04/when-soros-decided-to-go-for-
the-jugular/?_r=0)

~~~
Analemma_
They're trying to do the same time thing as Soros did, yes. But even after its
recent $300 billion spending spree to defend the yuan, China still has
trillions in foreign currency reserves left, orders of magnitude more than the
BoE ever did. And they have a cultural imperative against "giving in" to
Western capitalist pigs. I really don't think these guys have thought their
plan through.

~~~
imron
Exactly this. China also likes shows of strength, and would be more than happy
to expend large amounts of cash to bankrupt the people trying this, rather
than lose face being broken by them.

~~~
ISL
If each Chinese citizen were to sell $1000 worth of yuan back to the Chinese
government in return for 1000 USD, a trillion-dollar reserve would be
depleted.

~~~
rdancer
I don't get this. My mental image is all the toddlers of Beijing queuing at
the banks, with a wad of banknotes in one hand and a pacifier in the other,
unsure which one to give to the teller.

~~~
himlion
I guess he's using an ill-chosen metaphor to show one trillion isn't _that_
much.

------
Animats
Remember when the US was complaining that the yuan was undervalued to make
China's exports more competitive?[1] That was back in 2014. Now it's
overvalued.

[1] [http://yaleglobal.yale.edu/content/renminbi-undervalued-
thin...](http://yaleglobal.yale.edu/content/renminbi-undervalued-think-again)

------
randomname2
Kyle Bass went all-in, because 'this is much larger than the subprime crisis':

"Kyle Bass’s Hayman Capital Management has sold off the bulk of its
investments in stocks, commodities and bonds so it can focus on shorting Asian
currencies, including the yuan and the Hong Kong dollar.

It is the biggest concentrated wager that the Dallas-based firm has made since
its profitable bet years ago against the U.S. housing market. About 85% of
Hayman Capital’s portfolio is now invested in trades that are expected to pay
off if the yuan and Hong Kong dollar depreciate over the next three years—a
bet with billions of dollars on the line, including borrowed money."

------
sharetea
Pretty easy bet:

China Capital Outflows Rise to Estimated $1 Trillion in 2015

[http://www.bloomberg.com/news/articles/2016-01-25/china-
capi...](http://www.bloomberg.com/news/articles/2016-01-25/china-capital-
outflows-climb-to-estimated-1-trillion-in-2015)

Chinese banks' new bad loans more than doubled in 2015

[http://www.reuters.com/article/us-china-banking-npl-
idUSKCN0...](http://www.reuters.com/article/us-china-banking-npl-
idUSKCN0UQ04D20160112)

China Crash: $28 Trillion Debt Load Forces Credit Crunch

[http://www.breitbart.com/national-
security/2016/01/05/china-...](http://www.breitbart.com/national-
security/2016/01/05/china-crash-28-trillion-debt-load-forces-credit-crunch/)

Capital flight pushes China to the brink of devaluation

[http://www.telegraph.co.uk/finance/china-
business/12088033/C...](http://www.telegraph.co.uk/finance/china-
business/12088033/Capital-flight-pushes-China-to-the-brink-of-
devaluation.html)

Mark Hart: The Yuan Devaluation Still Has 50% To Go

[http://www.valuewalk.com/2016/01/mark-hart-the-yuan-
devaluat...](http://www.valuewalk.com/2016/01/mark-hart-the-yuan-devaluation-
still-has-50-to-go/)

------
MCRed
I don't subscribe to the WSJ so I can't read the OP, but I thought the Yuan
was wanting to rise, and that china was slowly letting it revalue. I thought
all the economic pressure was aligned that way. Chinese have currency controls
so they can't easily sell the yuan to buy other currencies (bitcoin is down
for the past couple weeks- the one currency which chinese people love and
which doesn't have any controls).

~~~
aembleton
In the future, when there is a link to a paywalled article from WSJ on HN,
just click on the `web` link. That takes you to a Google search. Then click on
the link to the WSJ from Google and you can read the full article.

------
mark_l_watson
It will be interesting to see what happens with China and Russian economies. I
think their best chance is major cooperation with other countries via economic
development zones (Silk Road, etc.) and trade. It seems like they are betting
on a multi-polar world. The problem for Russia and China is the the USA will
probably maintain its dominate military role for another decade or so.

That said, I think that the world economic situation is so complex and chaotic
that who knows. The USA might have a black swan economic event (my bet would
be on a digital credit meltdown, no ATMs, run on cash, etc.) that would affect
everything.

~~~
sharetea
Any reason, you, who lives in US and making a living off American companies,
would want an unlikely catastrophic event to destroy US, and hoping
authoritarian billionnaire dictators in China and Russia to gain even more
military power on the world?

~~~
mark_l_watson
I don't want that at all!

I am mostly optimistic about the future, but I also think it is a good idea to
make plans for unlikely, but disruptive events.

------
jbssm
It's quite interesting this news comes out when USD is taking an heavy hit
against HKD for the last days:
[https://finance.yahoo.com/q?s=usdhkd=X](https://finance.yahoo.com/q?s=usdhkd=X)

Depending in the leverage they used for betting against the HKD these people
might be at a serious risk of loosing everything they put there in case the
trend doesn't suddenly change or if they don't get enough money from other
sources to hold their leverage.

------
rdlecler1
China purposely engineered its economic growth to capture the lions share of
the reward, which leaves China with the lions share of the risk. Moreover with
capital outflows at record highs the only money going back into China is
sovereign so this shouldn't create a net flight of capital in the west that
would lead to a liquidity crisis.

China's been in an economic boom for 37 years and for the most part people
don't know what a bad market is. This is healthy for China. It will help shine
the light on poor management. The question is whether the CCP will make the
necessary changes which are antithetical to their stay-in-power strategy.

~~~
rdlecler1
Interesting that this comment was downvoted...

------
eru
I don't get how they can expect to make money off betting against the Hong
Kong dollar---I thought the HKD was fully backed by USD?

~~~
bcg1
They're probably betting that they can't maintain the peg.

~~~
eru
Reminds me off the speculation against the Estonian currency---they had a peg
against the Euro but were also fully backed. (I never followed up whether the
peg broke.)

------
siscia
Paywalled ? There is a free version ?

------
lossolo
And they thought ghost towns are the answer...

------
ryandamm
Non WSJ-paywalled article by Reuters:

[http://www.reuters.com/article/uk-china-forex-hedgefunds-
idU...](http://www.reuters.com/article/uk-china-forex-hedgefunds-
idUSKCN0V50YC)

Not the same article, FWIW.

~~~
melling
Isn't that what the 'web' rules under the title is for?

We really need an official with HN FAQ:
[https://h4labs.wordpress.com/2015/09/14/hacker-news-
faq-1-ho...](https://h4labs.wordpress.com/2015/09/14/hacker-news-faq-1-how-do-
i-read-an-article-behind-a-paywall/)

~~~
jsprogrammer
Relabel 'web' to 'no paywall'?

------
PakG1
What I'm about to say is unfortunate but true. China has a big us against the
world mentality. Economic "attacks" are often seen as attacks by nation
states, not by individuals, and as such, directly reflect foreign policy
attitudes. Language like this only adds fuel to the fire. Given the different
worldview about how the world works, motivations will always be suspect.
Official party mouthpieces will never view such actions as a secular step to
simply make money, and many especially uneducated people (who still make up a
huge portion of the country) would agree with the mouthpieces on how to
understand it. I'm not saying that we should coddle nation states. I am saying
that it's unfortunate that I think an economic exercise would result in
strained foreign relations at all levels. At the very least, it easily gives
the government a scapegoat on which to blame things.

~~~
diego_moita
> China has a big us against the world mentality.

It is a typical pattern on authoritarian mentalities and regimes. You'll find
the same in Russia, widely spread among the Latin American left and the
supporters of far right Republican candidates (Trump & Cruz).

The best to do is to "give them enough rope so that they hang themselves",
unfortunately. Authoritarian, centralized and anti free trade regimes end up
broken because they suffocate economic diversity, see Argentina, Venezuela and
Russia.

~~~
um_ya
And yet, people will continue to praise people like Bernie Sanders.
Centralizing government authority does not make the world better.

~~~
error_logic
Government is not the only form of centralization of power. Private entities
pose similar threats, at a certain point.

Sanders: "If an institution is too big to fail, it is too big to exist."

Government can centralize things, yes. It can also break up existing
centralized markets...and increase healthy competition.

~~~
um_ya
Sanders is simply taking power from several financial elites, and giving it to
a single centralized authority. Sanders fails to realize that the biggest
institution that is too big to fail, is the U.S. government. We should spend
more time dismantling all the government powers, and not adding to them.

~~~
error_logic
The increasing centralization of things like emergency powers that state
governors once controlled (details would take research to cite) is worrisome
and you make a fair point.

You lost me when you said "all" powers though. The Constitution is a 2nd draft
for a reason: We need some centralized power to keep a unified front in order
to benefit from the economy of scale it provides.

------
dguido
I was far more interested in this article when I thought the title was
"Concurrency War" :-(

