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Following the blueprint pioneered by George Soros—who once successfully broke the Bank of England by launching speculative attacks against the British pound—a handful of funds are taking aim at China's currency, according to a report.
As the world's second largest economy grapples with an economic downturn and volatile markets, The Wall Street Journal reported on Sunday that some of the largest hedge funds on Wall Street are stacking up bets against the yuan. According to the report, Kyle Bass' Hayman Capital Management recently jettisoned much of its positions so it could focus on placing bearish bets on Asian currencies, including the yuan and the Hong Kong dollar. Approximately 85 percent of the firm's bets are now concentrated on bets that will pay big dividends if the yuan and the HK dollar fall over the next three years.
Bass told the WSJ that China's woes are actually "much larger than the subprime crisis," and he believes the country's currency could plummet by as much as 40 percent.
In addition, billionaire investor Stanley Druckenmiller and hedge-fund manager David Tepper have taken short positions against the currency, also known as the renminbi, people familiar with the matter told the Journal. David Einhorn's Greenlight Capital holds options on the yuan depreciating, the report said.
The currency recently won major international backing, after the International Monetary Fund agreed to recognize it as a reserve unit. Ironically, the hedge fund positioning as reported by the Journal suggests investors have anything but confidence in the yuan's near-term prospects, or China's attempts to manage its slowdown.
For years, China has carefully choreographed the currency's movements in global markets, often guiding the currency lower. That has drawn widespread criticisms from major economies, primarily the United States, who have complained about the economic distortions caused by the yuan.
Economists widely believe that, as part of China's attempts to engineer a soft economic landing amid global turmoil, a weaker currency is likely to be part of the strategy. Yet a yuan depreciation is fraught with risks and global sensitivities, as it would all but guarantee cheaper Chinese goods flooding other economies.
In a recent research note to clients, Lombard Street Research analysts noted that "besides the domestic challenges, effective reform requires the world to accept the consequences of China's adjustment. This involves a weaker effective exchange rate for the yuan."