Kyle Bass’s yuan collapse view has scattered the cat among the pigeons.
The US-China trade war timeout has expired with no de-escalation of tensions insight. Two of the world’s heavyweight economies are now preparing for a full 12 round bout with neither side showing signs of backing in their corner. China’s has probably calculated that it can win the fight by standing in the ring long enough until the Trump administration has been voted out of office in the coming 2020 elections.
“China didn’t weaken the yuan, they just stopped supporting it”
So China’s tactic will be to delay and make strategic counter strikes particularly targeted at Trump supporters. Expect more pain for US farmers and US subsidies to counteract the pain.
The US Treasury has designated China as a currency manipulator, but that is not in lockstep with Kyle Bass’s yuan collapse view
Hedge fund manager and Hayman Capital Management founder Kyle Bass said recently (August 5) that without state support, China’s currency would plunge. Put simply, Kyle Bass’s yuan collapse view is based on China not taking proactive moves to support the yuan.
“China didn’t weaken the yuan, they just stopped supporting it”, said Kyle Bass.
The US Treasury isn’t buying Kyle Bass’s yuan collapse view
“China has a long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market. In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past” according to a recent report to congress of macroeconomic policies of major trading partners of the US.
“China has a long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market”
according to recent report to congress
So with China now officially being labeled a currency manipulator Kyle Bass’s yuan collapse view might not be fiction.
“What’s happening in China is they have to have dollars to sell to buy their currency to hold it up. If they were to ever free-float their currency, I think it would drop 30% or 40%” – Kyle Bass
Kyle Bass’s yuan collapse view ridicules the notion that China is a currency manipulator as most of the world’s trade is still conducted in US dollars.
“They claim to be 15% of global GDP in dollar terms, but less than 1% of global transactions settled in their currency” Bass added. “And so, they prop their currency up…everyone calling them a currency manipulator – they are trying to hold this whole thing together” argued Kyle Bass.
But here is the zinger regarding Kyle Bass’s yuan collapse view. China has decided to let its currency float which implies that the trade war has taken on another edge, a currency war. So with China no longer supporting the yuan by buying it and selling their foreign reserves on the foreign exchange.
What is China going to do with its massive foreign reserves? Buy US Treasuries? Unlikely.
Click for Kyle Bass’s yuan collapse interview.