20190904-China is shortage on dollar due to playing FX derivatives game?


WallStForMainSt (Kyle Bass’ Thesis on China):

Kyle Bass is the founder of Hayman Capital.  He started the firm in 2005 after leaving Legg Mason. 

His Thesis:

- China is short on dollars due to an over-all trade deficit with other nations including US - the reason China is fighting so hard on trade is while they run a big trade surplus with the US, they run trade deficits with everyone else everywhere else… They run a $400 billion trade surplus with the US but still their net trade account is negative.   What US is doing is putting some tariffs to at least level the playing field on unfair trade practices and that’s why they are really pushing back so hard, cause they are out of dollars… they aredesperately short dollars and now their current account is negative. 

-China has been selling enormous “Forward Dollar Swaps” in order to support RMB.  So basically it is shorting dollars hoping that the dollars will get weaker.  Unfortunately, the opposite has happened due to trade war and other events and dollars have been going up.  Therefore since China has lost a huge sum of dollars in the FX market, it has a big shortage of US dollars.
-This thesis can be perhaps supported by Bank of Jinzhou’s problem of having to skip a year of interest payments to its international bond holders on its dollar bonds this month.   It also reported 6X increase in bad loans.   This failure to pay has really spooked the Chinese bond market and holders of the dollar based bonds.

-China will probably not let this happen if it has enough dollar reserve to save this bank.   If they have the dollar reserve, it will be very easy to cover this up, since they already bailed out 3 other banks earlier this year.    Why not bail out Bank of Jinzhou too?

-Since August China has been selling dollars using forward swaps trying to stop the RMB falling below $7 and was unsuccessful.

-Another case in study-  in 2013, Brazil has tempted with this trade strategy with no success and saw its currency lost more than 50% in value.

-This is a dangerous game that China is playing.  Who knows how much further down RMB will go?  

-Also if Chinese government can’t bail out the banks, there might be more bank failures coming to light in the near future.

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