Yuan speculator says China reserves could drop US$200b in January

[LONDON] The monthly fall in China's hard currency reserves could almost double to around US$200 billion in January, bringing Beijing closer to a deeper devaluation of the yuan, one of the western hedge funds betting big against the currency said on Monday.

A plunge in reserves of US$108 billion in December was the biggest monthly fall on record and one of the factors spurring a wave of sales of the yuan by Chinese traders and speculative western funds earlier this month.

Chinese reserves have fallen steadily over the past 18 months, from US$3.99 trillion in June 2014 to US$3.33 trillion in December.

Omni Macro Fund Chief Strategist Chris Morrison said a change in how The People's Bank of China intervenes on the offshore market in the yuan would help push that figure sharply higher this month.

"They are currently reporting zero for the intervention in dollar-CNH, because they have been rolling over the forwards and never actually delivering in US dollars," Morrison said. "What was interesting in January was they didn't roll over the forwards, so that should be reported and add to the fall in reserves. January's fall will be larger than December's, I'm thinking around US$200 billion."

Very few of the hedge funds that have rounded on the yuan as overvalued have been willing to talk about their trading strategies and the details of China's defence of the currency in wholesale financial markets. Omni has been betting against the yuan since the start of 2014.

Morrison, previously a proprietary trader for RBS and JPMorgan, said that after a "good result" from China's sharp one-off devaluation last August, the fund had taken more profit on the trade before a round of strong action by Chinese authorities to stabilise the currency earlier in January.

He said Omni had re-entered the trade when prices of currency forwards came back down just over a week ago.

China's FX reserves remain the biggest ever accumulated in nominal terms and while a fall for the yuan is one of the big consensus plays among bank analysts this year, most forecasts call for a decline of less than 10 percent.

Against that are the periodic bouts of panic seen on Chinese financial markets over the past six months and resulting capital outflows which have eaten into the reserves Beijing has to resist a large immediate drop in the yuan's value.

"Something in the region of a 15-20 per cent move (in the yuan) is perfectly reasonable," Morrison said. "But if China has a crisis, it is radically too conservative. Then it should be something like the dollar going from 6 to 9. I'm not just making that figure up to be dramatic, that's just what some other emerging markets have done, look at Turkey or Brazil."

REUTERS