My favorite movie of last year was “The Big Short,” which was based on the Michael Lewis book about a few market contrarians betting against the housing market bubble that led to the Great Recession. I’ll admit it’s my favorite because – for once in my life – my family was impressed with my knowledge of the movie’s subject matter. I mean, if Dad and Selena Gomez are both trying to explain complicated financial concepts, maybe Dad is not such a dork after all – right?
These days, I can’t help but wonder if we are seeing a similar contrarian market story play out in another arena: The fight between some large hedge funds and the Chinese government over the value of the Chinese currency.
The hedge funds have made implicit bets that there will be hard landing, or even a crash, in the Chinese economy. The Chinese government is looking to keep its currency stable.
Recently we have gotten signs that, at least so far, the Chinese government is holding out against the forces of speculation. This week, it was reported that $562 million worth of options that would have paid out if the U.S. dollar strengthened above 6.60 yuan per dollar have expired – worthless – since August. And over the next three months, another $807 million will expire with the yuan trading around the 6.50 level.
Score one for the Chinese.
That government’s problem, however, is that it must contend with the behavior of its private sector – to the extent that China’s private sector can truly be called “private.” This week, for instance, Chinese insurance company Anbang Insurance Group announced a $13 billion bid for Starwood Hotels. This is the largest-ever takeover attempt of a U.S. company by a Chinese company, and it came just one day after Anbang agreed to pay $6.5 billion for Strategic Hotels. In 2014, Anbang bought New York’s historic Waldorf Astoria hotel. And just this week, Hollywood’s historic Yamashiro restaurant and hotel was sold for nearly $40 million to a company based in Beijing.
Such capital outflows indicate a desire by Chinese companies to buy U.S. assets before they presumably get more expensive later this year, if their currency falls in value. By doing so, they also work against the Chinese government’s efforts.
My View: Whether or not this conflict makes it to the big screen, this truly is high drama in the global financial markets. Our view remains that over the short-term – the next three months or so – the Chinese government can hold the yuan steady. But it is such a heavy burden that we do expect the currency to weaken before the end of this year.
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