The Phaserl


Shorting the yuan is dangerous

by Alasdair Macleod, Gold Money:

Last Sunday (31 January) Zero Hedge ran an article drawing attention to the big names in the hedge fund community who are betting heavily that the yuan will suffer a major devaluation any time between the next few months and perhaps the next three years.

The impression given is that this view is universal, almost to the exclusion of any other.

A market cynic would point out that when everyone is short, there is no one left to sell, so it is a good time to buy. This may indeed be true, and gives the Chinese authorities the opportunity to squeeze the bears mercilessly should they so choose.

However, as Zero Hedge points out, some bear positions are in the form of put options rather than naked shorts, so hedge fund losses in this case would be limited to option money if the trade goes wrong. Instead, whoever sold the options to them will ultimately absorb the losses to the extent they have not hedged their corresponding positions in turn.

The advantage of buying long-dated OTC put options is that you can wait for a financial strategy to come right. The motivation for buying them is therefore less to do with market timing, and more to do with economic expectations.

At its simplest, the common view appears to be that China is suffering from the debt problems that follow an excessive expansion of bank credit, the unwinding of which is expected to lead to crippling deflation. This view is variously informed by the findings of Irving Fisher in his analysis of the 1930s depression, and perhaps the Austrian school’s description of credit-driven business cycles thrown in. To these can be added the experience of modern credit bubbles, particularly the aftermath of the sub-prime crisis of 2007/08, which remains fresh in hedge-fund managers’ minds. It amounts to a rag-bag of impulsive thought, and consequently it is assumed a large devaluation will be required to reduce the prices of China’s exports, so that China’s labour force will remain competitive and employed.

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6 comments to Shorting the yuan is dangerous

  • Craig Escaped Detroit

    In a nutshell. The BOTTOM line, is that it is dangerous to have any of your wealth into any kinds of PAPER.

    As for China’s currency? Yes, China has leverage & debt problems, although it’s basically all “internal”.

    And the bottom bottom line about China’s currency? No matter HOW much it SHOULD fall down, you must NEVER NEVER forget, that China is quietly sitting on about 25,000-35,000 TONS of solid GOLD in government vaults, and is expected, SOMEDAY, to declare that it is putting GOLD behind their currency.

    On THAT day, they will have the strongest currency on earth, and the USSA, Europe, Canada, UK, etc, will have bullshit for money.

    Actually, bullshit & cow manure has VALUE (fertilizer), and the paper money will not be valued for anything at all.

  • Ed_B

    “Shorting the yuan is dangerous”

    It sure is… and so is shorting most anything. One can get poor in a hurry trying to get cute and be on the short side of a trade. Anyone doing that had best be REALLY nimble.

    Anyone who just HAS to short a currency would be MUCH better off shorting the yen. Been there, done that, got out, and made money.

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