Tuesday, January 12, 2016


Clever these Chinese.  Got a problem with the market.  Well, kill the market.

I was planning on exploring this issue from a somewhat different perspective but the boys in Beijing beat me to it with their simple, elegant solution.  You see, there are really two very distinct kinds of Chinese currency; one resides in China and the other in Hong Kong.  Oh, they are both the same it is just where they are on deposit that counts.  There is quite a bit in China but not very much in Hong Kong and if you wish to trade in the currency you have to do it in Hong Kong if you are a foreigner because the Chinese don't want the Gueilos messing with the Yuan back home (at least those who speak Cantonese--I don't know the Mandarin).  Soooo, if you don't like what is happening--and the Chinese think that any trading in their currency except by the is "speculation"--if you have enough reserves (and they do), and the willingness to spend a bunch (they have that too), and the know-how (in spades), you just go into Hong Kong and points East and West (because at the end of the day it pretty much all comes back to Hong Kong)  and sell dollars like crazy and buy Yuan.  Guess what?  At the end of the day you own all the Yuan on deposit in Hong Kong and that boys and girls is what is known as a short squeeze.  If you are nice about it you let everybody know what you intend to do.  If you are not...well, beware of falling bodies.

The Chinese were apparently nice about it but it killed "speculation" in the Hong Kong market stone cold dead to the point where there was a premium for the off-shore over the on-shore.  As Billy Salomon once said, "If you don't own it, you can't sell it."  I would add especially in very small markets.  Anyway, the great run in the Yuan is over---for now.

Of course the problem is not the Yuan per se.  The currency only reflects the underpinnings of the economy and right now the Chinese themselves seem not to like their economy and seem to be shipping dollars out of the country whenever they get their hands on them.  Down again went the Shanghai but today the U.S. held in there very well (Guys, I'm good but not that good) so maybe I'll take a day off tomorrow and test the theory.  Oil broke $30 a day for a short period and the price for spot in The West Texas Town of El Paso traded through $26.  Alcoa warned that 2016 was going to be a stinker and to be honest, there was a lot of wishful thinking going on but not a lot of positive news.  On the contrary, about two hours ago those wonderful Iranians announced that they were holding 10 U.S. sailors as a result of some sort of territorial violation, but John Kerry was on the case, it was all a misunderstanding,...they'll be released shortly...blah, blah.  Bad things can happen very quickly in this world which drive risk managers nuts.  Amazing, those Iranians.  They are now fully convinced they can do ANYTHING with complete impunity...even 5 hours before the State of the Union address at which in regard to this incident one of two things will happen: either dead silence or the announcement of the release of the sailors as a shining example of the brilliance of Il Duce's foreign policy.  Can't wait...unless it runs opposite NCIS.

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