China continues to face some tough times in its economy with the Yuan losing value and hedge funds making bets on it. There have been various attempts to keep off the bets, but nothing seems to be working for the Yuan. According to Chris Morrison of Omni Partners, there will be enough Yuan to borrow and sell as funds flow offshore. The only way to stop that will be for China to come up with some dictatorial regulations for capital control. Morrison has also predicted that the Yuan could fall 15% in 2016. China has the option of increasing its interest rates to deal with investors betting on the Yuan, but that plan would work against the economy.
The strategy that the People Bank of China used was to buy the currency in large amounts, which diminished its supply and consequently increased borrowing costs. This plan scared a few people away, but there are still some hedge funds that are betting against the Yuan. Crescent Capital, for instance, has been betting on the Chinese currency since 2014. The Chinese government is warning investors against making such bets because they say exchange rates will stabilize.
The fall of the Yuan
The Yuan devalued in August of 2015 and did not recover. Since then, the currency has seen 5.6% devaluation. The move by the PBOC was intended to ease the effect of the decreasing value of the Yuan. A lot of people started moving their money out of the country when the economy saw an increase of 6.9% in 2015, which is the lowest figure in 26 years.
Yuan loan from the Hong Kong Interbank Offered rate saw a decline of 4.87% in the last week of January, which was lower by 59 basis points from Dec 31. There was a huge gap between the offshore and onshore exchange rates, especially when the discount fell to 2.9%, which is a record low. There have been fears over the value of the Yuan as it waits to join the reserve currency of the International Monetary Fund in October.
Highland Capital and James Dondero
Highland Capital Management is an alternative credit management firm that offers clients various credit strategies and separate options such as hedge funds, distressed investment funds, collateralized loan obligations, and private equity among others. The company also specializes in alternative investment such as natural resources and emerging markets. HCM has an average of 21 billion assets and offers its services globally. Watch Jim and the Highland team ring the NYSE Closing Bell below.
At the head of HCM is the president, James Dondero, who is also the co-founder of the company. Jim is also a portfolio manager and managing partner who deals with the private equity business. Dondero is also a chartered financial analyst (CFA), Certified Management Accountant (CMA), and Certified Public Accountant (CPA).
Jim’s portfolio management expertise spans a broad range including; preferred stocks, high-yield bonds, mortgaged backed securities, leveraged bank loans, emerging market debt, and derivatives and investment-grade corporations.