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Offshore Short Positions Are Low, And 6.9 Short Selling Of Renminbi Becomes A Dangerous Game.
- Oct 29, 2018 -

Last Friday (October 26th), offshore and onshore RMB touched 6.97 and 6.96 points respectively. In the afternoon, Pan Gongsheng, deputy governor of the People's Bank of China and director of the State Administration of Foreign Exchange (hereinafter referred to as the "Foreign Exchange Bureau"), called short on the RMB, saying that "if you handed it over a few years ago, it should be fresh in your mind," and that the RMB surged nearly 200 points onshore and offshore, recovering all lost land.

Despite the reappearance of "shouting", the boldness and position of "big short" are no longer as great as those of 2015 and 2016.

Part of the depreciation is still due to market demand and supply. Although it is impossible to verify the positions of short RMB hedge funds and other institutions, according to recent interviews with offshore banks and related institutions by First Financial Reporter, the short-selling momentum has indeed climbed since June this year (RMB depreciates nearly 4% a month), but the positions are still very restrained, and most institutions have begun to level off around 6.75. Warehouse, when the dollar / Renminbi came near 6.9, even if the renminbi is still expected to depreciate, but the risk of unilateral bets institutions are very small, and some hedge funds told reporters that has begun to pass the HKEx CNH (offshore renminbi) futures moderately long Renminbi.

Luo Yi, head of foreign exchange trading at an offshore foreign bank, told First Financial Reporter that there were far more "big short" in 2015 and 2016 than there are now, at least four to five times, but eventually they were blown up by the central bank's intervention. "For example, there is a famous New York hedge fund specializing in short RMB, mainly trading RMB short options, volume up to billions of dollars. This is absolutely not a case, but in 2016, 2017 they have a big shorting of the renminbi, now to 6.9 there is no big short position of the courage.

"It can be said that this year's RMB short and long days will not be too good." Zhou Hao, senior economist at Commerzbank, Asia, told reporters.

In recent years, the central bank has supported the strengthening of RMB exchange rate flexibility and the degree of intervention has been greatly reduced, and many scholars have issued papers calling for a weakening of attention to the "7". However, facing the current internal and external environment, there are also views that maintaining the stability of the RMB expectation is still the first priority consideration in the near future, "the drawbacks of RMB devaluation may be great." The benefits that can be imagined. Sheng Songcheng, counselor of the Shanghai Municipal People's Government and former director of the investigation and Statistics Department of the People's Bank of China, said to the first financial reporter. Of course, the exchange rate has always been relative, there has not been a depreciation of the RMB, nor has there been a constant appreciation of the US dollar, the future changes in the US dollar, the euro is still a variable worthy of attention.

Market temporarily fluctuated in 6.9 intervals

By midday on October 26, the yuan was trading weakly, with onshore and offshore renminbi hitting their weakest levels in years of 6.96 and 6.97. Finally, the US dollar / RMB closed at 6.9435, and the US dollar / offshore renminbi closed at 6.9564.

"For those who tried to short the renminbi, we had a few years ago and we knew each other very well, and I think we should all remember. We have the foundation, ability and confidence to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level. Pan Gongsheng said.

"The offshore renminbi rebounded, but there was no sharp reversal of nearly 1,000 points in August (when the central bank announced a restart of the counter-cyclical factor and levied a 20% reserve on forward purchases). On the one hand, the central bank was still a'verbal intervention', and on the other hand, the recent depreciation was mainly due to market supply and demand (purchases of foreign exchange by individuals and enterprises). Instead of coming from too much speculative short selling, there will be no big short liquidation. Luo Yi told the first financial reporter.

"Taking into account the position of the central bank, it is expected that in the next period of time, the RMB will fluctuate at 6.9." He told reporters that after the US dollar / RMB touched 6.8, the exchange rate was in a slow upward trend, indicating the market's cautious trading attitude, "For example, when the US dollar / RMB touched 6.95, traders often choose to do long Renminbi, and if it reached 6.85, someone began to sell Renminbi, which also led to the recent RMB. They are all in a state of interval fluctuation. "

The reason why the recent weak trend of the renminbi is closely related to market supply and demand and external fluctuation.

The beginning of the second half, a number of Chinese funded financial marketing people are feedback to reporters, the purchase pressure is still too large. In October 18th, the central bank data show that in September Chinese foreign exchange balance of a decrease of 119 billion 395 million yuan, a decline of the largest since January 2017 September; foreign institutions total holdings of RMB bonds (5 billion 100 million yuan) fell 90%, decline in capital inflows support.

Bank Financial Research Center Chief Financial Analyst E Yongjian told reporters that in September the banking exchange deficit widened, mainly due to foreign exchange settlement deficit, combined with before the foreign exchange reserves and foreign exchange reduced, show that the continuous depreciation of RMB in the case of cross-border capital outflow has a gradually increasing Sign.

On the external conditions, the tension between shamei trade friction, Italy's continuing budget problems, as well as the global economic slowdown fears, to become the dominant market hedge mood, the dollar strengthened across the board cited. In addition, since December 2015, the Federal Reserve has raised rates 8 times, interval level of short-term interest rates from near zero levels continued to rise to 2%~2.25%. For now, the Fed rate hike this year may exceed expectations and higher than the neutral rate level (the Fed itself is expected in 2020 will raise interest rates to 3.4%, the long-term equilibrium rate of 3%). At present, the US dollar index remains at 96.35.

"Big short" dare not make a big warehouse short.

Pan Gongsheng in the October 26th briefing propaganda yuan bears said, in recent years, in response to the exchange rate and foreign exchange market volatility in the foreign exchange bureau of the people's Bank, has accumulated rich experience and policy tools, according to the change of the situation, take the necessary measures.

Despite the depreciation, offshore hedge funds are reluctant to short the renminbi in the face of the central bank's stance and the experience of two years ago.

Crescat Capital, a US hedge fund, is reported to have started to make a profit as the renminbi depreciated by 4% in June, but in fact, the fund lost more than 20% in 2017, 80% of which was due to short the renminbi. After October 2017, the strength of the renminbi rose and reached below 6.3 at the beginning of this year.

In 2015, short selling of renminbi was prevalent in foreign institutions. According to foreign media reports, in the summer of 2015, US hedge funds Hayman Capital and Corriente Advisors short the renminbi through derivatives, the renminbi depreciated once after the "8.11 exchange reform" and hedge funds began to make profits. Since 2016, short selling has gained more momentum in the offshore market, once leading to a rapid expansion of the cross-strait exchange rate gap between the RMB.

At that time, the offshore short plate generally choose in the interbank market to borrow offshore RMB Exchange (i.e. buy dollars), to obtain income through long-term foreign exchange market. The first is simply borrow RMB, buy dollars, waiting for it to rise, rose to a certain extent, sell it, this is called the settlement, and the settlement itself is usury." Zhou Hao told reporters.

This logic reversed completely at the beginning of 2017. First, the central bank to strengthen the management of cross-border capital flows, in addition, the central bank also by tightening the offshore renminbi liquidity, rising capital costs (short interbank RMB interest rate rise), they were forced to open the settlement, the stampede caused a short rapid deleveraging, causing the renminbi rose.

This is also what pan has said, "a few years ago, we all handed in and knew each other very well".

May the central bank billions of dollars is not a big number, but for traders and hedge funds are Zhenjinbaiyin, but there is also a substantial loss must immediately stop." Luo Yi told the first financial reporter. He said, "at that time, even a famous Texas fund managers are beginning to say," we before the RMB extremely pessimistic, but now lost badly, we decided to see more yuan! "I smiled to other traders said, now is the moment when the dollar / yuan inversion, and inversion to the. By 2017, the yuan had risen to nearly 10% against the US dollar.

In fact, this awe attitude has continued in foreign institutions. Even this year, shorting the yuan fund also in 6.7, 6.8 positions or the position control is very small, on the one hand because the offshore market capacity decreased from 1 trillion yuan in December 2014 to 600 billion yuan, more vulnerable to short overnight financing costs soared down; that is the use of foreign exchange options and other derivatives, also with With higher costs.

It is worth noting that the 9 20 April evening, the central bank and the Hongkong Monetary Authority signed a "on the use of the CMU Chinese notes issued by the people's Bank of the memorandum of cooperation", the main content is to facilitate the central bank issuing central bank bills in Hongkong. Luo Yi told reporters, "now the central bank has not yet officially opened the bill to tighten offshore liquidity, the intervention remains cautious, but once enabled, will greatly uplift short short cost."

Central banks offer diversity tools

In August this year, as pressure mounted on the renminbi to depreciate against the dollar, several tools that played an important role in short-selling in 2015 and 2016 reappeared.

First of all, since August, the quotation lines of the RMB-US dollar exchange rate have taken the initiative to adjust the "counter-cyclical coefficient". This is the resumption of the anti cyclical factor since January this year.

In August 6th, the central bank adjusted the foreign exchange risk reserve ratio of forward selling foreign exchange business from 0 to 20%. This kind of "Tobin tax" (transaction fee for foreign exchange transactions) tool was launched in October 2015, September 2017 RMB market is expected to stabilize after the re-zero. The restart is intended to curb excessive volatility in the market and combat cross-border foreign exchange arbitrage.

However, unlike three years ago, the central bank this time stressed that some cross-border investment business temporarily does not collect foreign exchange risk reserve.

In fact, it is not difficult to see through foreign currency data that despite the fluctuations, the overall situation of stability has not changed.

On October 25, the Foreign Exchange Bureau released the latest foreign exchange receipts and payments, showing that in the first three quarters, the bank balance of settlement and sale of foreign exchange deficit fell by 75% in dollar terms. In particular, in early October, there was a small surplus in bank settlement and foreign exchange receipts and payments. As of September this year, the balance of foreign exchange reserves stood at US $3 trillion and 80 billion.

As for the trend of the euro and US dollar, there are still variables. This year, the euro continued to weaken because of frequent euro zone risks and unpredictable economic data, while the U.S. economy continued to expand due to fiscal stimulus such as tax cuts, interest rate increases, and the impact of trade frictions more reflected in emerging markets, which led to the influx of safe-haven funds into U.S. dollar assets, pushing the U.S. dollar to appreciate nearly 10% in 2018.

The strong dollar is undoubtedly one of the biggest pressure points of the renminbi. But more and more people are rethinking that if the Trump administration's tax changes start to fade next year, if the risk of trade frictions continues to manifest itself in the U.S. capital markets, and if the euro rebounds, there is a possibility that today's consistent bullish dollar expectations will reverse. Recently, US stocks continued to crash, partly reflecting the market's worries about earnings peaking and risk accumulation.

Matt Weller, a chartered market analyst at Goldman Sachs, told reporters that the euro / dollar is still within a broad range of 1.13 to 1.18 in the outlook for the future. Below 1.13 space is not big, Italy's budget problem is expected to be resolved, as long as the UK's exit from Europe does not have a huge impact, the European Central Bank will start next summer to raise interest rates under the expectation that the euro may rebound.