Kyle Bass on wrong currency short as Chinese debt “metastasises”

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From Kyle Bass today via Reuters:

Hayman Capital Management founder Kyle Bass on Thursday said he remains short the Chinese yuan despite the country’s latest change to the guidance rate, because he believes credit bubble problems are “metastasizing.”

“What the public narrative is and what they have been doing behind the scenes are two completely different stories,” Bass said in a telephone interview. “China has been masterful controlling the public narrative. As a fiduciary, I have no idea how anyone can invest in China.

Bass, who has long argued that the Chinese yuan is set to fall 30 percent against the U.S. dollar, identified fresh warning signs that China’s credit problems have spread.

Indeed, CBRC vice-chairman Cao Yu said China established 12,836 creditor committees by the end of last year, to help manage credit of 14.85 trillion yuan. Bass said this amount represents 20 percent of the loans in Chinese banks, net of mortgages.

Bass said he believes non-performing loans at Chinese financial institutions are running at a 20 percent rate, not the 1.7 percent rate that has been widely reported.

Bass said China’s Anbang Insurance Group, one of China’s most aggressive buyers of overseas assets whose chairman has been detained by the police, illustrates China business risks.

…Bass noted that he has not always been a China bear and said China has been looking to force out one-way bearish bets on the yuan with second change this year in how the currency’s guidance rate is calculated.

An even more deeply inverted yield curve today’s lends some market support to the bearish view:

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And Anbang sure is a mes, via Bloomie:

Pressure is building on Anbang Insurance Group Co. as Chinese banks distance themselves from the owner of New York’s Waldorf Astoria hotel amid a wide-ranging government probe that landed Chairman Wu Xiaohui in police custody.

Chinese authorities have asked lenders to suspend some business dealings with the insurer, according to a person with knowledge of the matter, who didn’t provide further details. At least six large banks have stopped selling Anbang policies at their branch networks, with some taking action before the government notice, people with knowledge of their operations said.

The directive strikes at the heart of Anbang’s business model and raises questions about how much China will tighten the screws on an insurer with $294 billion of assets and more than 30,000 employees. Anbang’s life unit distributes almost 90 percent of its products through banks, collecting premiums that Wu has used to snap up global assetsfrom U.S. hotels to a Belgian lender and a South Korean insurer.

“It’s like having your legs broken,” said Grace Zhou, a Hong Kong-based analyst at ICBC International, referring to the reported block on Anbang’s bank channels. “It’s their main source of revenue.”

The development marks the latest twist for a company that rose from obscurity to global prominence in just over a decade, helped by government-linked backers and sales of investment-like products that promised big returns to mom-and-pop savers.

For now, however, it is contained. Growth has enough momentum to get the economy to its 6.5% CY target, with 6% probable in the second half. That ought to be enough to stop too many dead bodies floating to the surface.

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As well, the PBOC is managing the yuan well, via the FT:

Pity the currency trader trying to make sense of the renminbi exchange rate this year.

Tao Wang, co-head of Asia economics at UBS in Hong Kong, says that China’s moves last year to tighten capital controls have succeeded in slowing the torrent of outflows to a manageable trickle. She also notes that market expectations often outweigh fundamentals in foreign exchange markets.

…In addition, direct PBoC support for the renminbi through dollar sales has not completely stopped, despite the headline rise in foreign exchange reserves. These rises are largely due to valuation effects from changes in exchange rates and asset prices.

…More important, the PBoC has also found ways to discourage bearish bets on renminbi that do not require deploying precious forex reserves. Last month, the central announced a change to the way it sets the renminbi’s daily fixing.

The introduction of a “countercyclical factor” in the fixing formula essentially grants the PBoC greater discretion to guide the renminbi in a particular direction, even when the previously announced formula pushes in the opposite direction.

“The countercyclical factor sent a strong signal about the PBoC’s intention. The market’s expectations shifted dramatically,” says Xiao Lisheng, deputy director at the Chinese Academy of Social Science’s Institute of World Economics and Politics.

“Suddenly all these exporters who were hording their dollar receipts decided it was time to convert to renminbi.”

The bigger question remains, what happens after the 19th National Congress later this year? Will Xi Jinping’s newly stacked poliburo take another crack at reform?

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If so, that’s when growth will really slow and the bad loans turn unruly. I think it more likely than not given the alternative path of letting credit rip all over again sooner rather than later poses an even higher risk to political stability. Though I’d caution that after some more structural reform and slowing growth I still expect further rounds of stimulus as well.

When and while reform returns, Kyle Bass will be proven right about about powerful yuan outflow pressures but I fully expect the capital account to close even further to combat it.

Thus, if I were him I’d be using the Australian dollar as a Chinese proxy short, given the reform scenario sees both Australia’s commodity and housing markets simultaneously adjusted.

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There will be no save for the Aussie dollar.

The MB Fund launching July 1st is positioned for these events. Sign up today!

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.