By Chelsey Dulaney and Steven Russolillo
Investors are piling into bets against China's stocks and
currency, reviving what has been one of Wall Street's most popular
-- and painful -- trades in recent years.
Asset managers including Invesco Ltd. have amassed positions
that will pay off if the Chinese yuan continues to slide, while
investment firms like Muddy Waters Research and Blue Orca Capital
LLC have announced new bets against Chinese stocks.
Rising interest in shorting, or betting against, Chinese markets
comes amid an intensifying trade spat with the U.S. that investors
fear will exacerbate the country's economic slowdown.
"If you get the next round of tariffs, it's going to deliver a
larger economic shock than what you witnessed in Asia in 2015 and
2016," said James Ong, a senior macro strategist at Invesco who is
betting against the Chinese currency. "It might challenge their
control of the currency to a greater degree."
On Friday, China said it would impose levies on $60 billion of
U.S. goods if Washington moves forward with plans to more than
double its tariffs on Chinese imports.
Trade fears have already rocked Chinese markets in recent
months. The yuan has tumbled around 5% against the U.S. dollar this
year, while the Shanghai Composite Index is down 17%. Investors
have made roughly $7.1 billion betting against Chinese and Hong
Kong companies, according to Ihor Dusaniwsky, head of predictive
analytics at S3 Partners.
That comes after a dismal 2017 performance for short-selling
investors, many of whom were caught off guard by last year's global
market rally. The Shanghai Composite and yuan jumped 7% against the
dollar, while Hong Kong's Hang Seng Index surged 36%. That sent
short sellers to a roughly $35 billion loss in 2017, according to
S3.
Kevin Smith, founder of Denver-based asset manager Crescat
Capital, was one of them. His firm's global macro hedge fund
declined 23% last year, the worst return in its 12-year history,
thanks to bets against Chinese stocks and the yuan.
The dismal performance led to the departure of two of the firm's
largest clients and brought its assets under management down to $46
million from a peak of $94 million in 2016. This year's market
reversal has helped the fund recover 14% through June.
"From everything we can see, it's happening now," said Mr.
Smith. "The currency is declining; the equity markets are in a bear
market. I think this is going to be one of our best years
ever."
U.S. investors have long sought to profit by shorting Chinese
markets. Carson Block, founder of San Francisco-based Muddy Waters
and a subject of the 2017 documentary The China Hustle, rose to
fame in 2011 after he revealed fraudulent practices at Chinese
forestry company Sino-Forest Corp. The company filed for bankruptcy
the following year.
His latest target is TAL Education Group, an after-school
tutoring firm in China he claims is "a real business with fake
financials" and has likened to the 2001 Enron accounting scandal.
The company's U.S.-listed shares had risen over 50% this year
through June 12 before he unveiled his bearish thesis on the
company. Since then, the stock has dropped around 30%. A TAL
spokesperson didn't immediately respond to a request for
comment.
Soren Aandahl, who runs Texas activist investment fund Blue Orca
Capital LLC, last Tuesday unveiled his latest short bet: GDS
Holdings Ltd., a provider of data-center infrastructure and
services in China. Mr. Aandahl criticized the company's "staggering
debt burden" and raised concerns about the company's ability to
repay dollar-denominated debts amid the yuan's slide. GDS's
U.S.-listed shares tumbled 37% the day the report was published.
The company said in a statement that Blue Orca's claims are "false"
and "reflect a fundamental misunderstanding" of its business.
Other investors are betting on broader declines in China's
markets. Short sellers have added roughly $300 million in bets
against the iShares China Large-Cap ETF this year, according to S3
Partners. They've also raised short bets on Chinese companies
trading in Hong Kong that would likely be harmed by a slowdown in
growth, such as property developer China Evergrande Group and
cement manufacturer Anhui Conch Cement Co.
Paresh Upadhyaya, a portfolio manager at Amundi Pioneer, had
long avoided betting against the yuan due to the cost of shorting
the currency. A few weeks ago, he began shorting the yuan in
offshore markets for the first time "in recent memory."
"The real wild card is these trade tensions and how much further
do they escalate," Mr. Upadhyaya said.
Many investors have struggled to turn a profit on bearish China
bets in the past. That's in part because some underestimated
China's ability to stabilize its economy and financial markets,
analysts say. Beijing maintains tight control over the value of the
yuan, liquidity in the financial system and the ease of taking
money offshore -- all tools China tapped to help control the
fallout of its 2015 currency devaluation.
"People have gotten China very wrong before," said Mr. Aandahl.
"There's a classic quote in short selling: It's not enough to be
right; you have to be right, now."
The Chinese government has also struck back at short sellers in
the past, launching investigations into some investors and
squeezing others out of positions by driving up the cost of
borrowing in Hong Kong, where many investors short Chinese assets
due to fewer restrictions.
Beijing revived efforts to deter short sellers on Friday by
announcing it will impose a 20% deposit requirement for trading
currency forwards, effectively making it more expensive to bet
against the yuan.
China's efforts to control market reactions have driven many
bearish investors out of the market and left others hesitant.
Hayman Capital's Kyle Bass scaled back his China position after
the fund posted its worst-ever annual return in 2017, he told The
Wall Street Journal earlier this year. Mr. Bass didn't respond to
requests for comment. Longtime China bear Jim Chanos has also
scaled back his bets against China, saying in an email: "Given the
eight years of underperformance of the Chinese market, we are less
short China now than in the past."
Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com and Steven
Russolillo at steven.russolillo@wsj.com
(END) Dow Jones Newswires
August 04, 2018 12:14 ET (16:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.