Hugh Hendry, the hedge fund manager known for his bearish bank bets during the financial crisis, said he disagrees with peers including Kyle Bass who say China will suffer a crisis and major devaluation.
Eclectica Asset Management is betting China’s offshore interest rates will rise as policy makers seek to spur demand for the yuan and discourage investors from shorting the currency, Hendry said Wednesday at the Absolute Return Symposium in New York. The wager, executed by entering a payer position via offshore rate swaps, has “immense profit appeal,” he said.
While Hayman Capital Management’s Bass -- who also profited from the crisis -- said last week that China faces a devaluation in excess of 30 percent and a potential banking crisis that would trump that of the U.S., Hendry says policy makers in the world’s second-biggest economy wouldn’t risk such a drop because of the impact on consumption.
“It would be profoundly silly,” he said. “Our lives, every member of this room’s life would change dramatically,” he added. “Chinese people are becoming wealthier and they’re spending. To have a 20 percent devaluation strikes at the heart of that policy.”
The one-year non-deliverable interest-rate swap -- the fixed payment to receive China’s floating seven-day repurchase rate -- has averaged 2.2 percent since the end of December in Hong Kong. That compares with 2.59 percent last year and 3.73 percent in 2014, when the economy expanded 7.3 percent. Growth is forecast at 6.5 percent this year, according to analysts polled by Bloomberg.
Hendry, who six years ago warned of a potential crash in China, has become more bullish on the nation’s prospects. He said in a July 16 interview that Chinese stocks would gain over the long term because of unprecedented economic stimulus and the end of a rally in commodities. The Shanghai Composite Index has since tumbled 28 percent.
His global macro hedge fund returned 6 percent last year and 10 percent in 2014, he said at the conference.