Stratton Street: China’s capital flight overplayed

Added 22nd April 2016

Analysts have recently warned about China's currency risks, but Stratton Street Capital fund manager and partner Andy Seaman offers a contrarian view.

Stratton Street: China’s capital flight overplayed

Around $108bn in capital fled China in December, further depleting foreign reserves that the government has been using to prop up the RMB.

London-based Seaman, however, believes the capital flight danger is exaggerated. 

"There is some capital flight, but the authorities have [taken measures to] clamp down," Seaman told Fund Selector Asia.

He believes capital flight was only temporary and pointed to China's foreign currency reserves at the end of March, which rose for the first time in five months. Reserves were up slightly by $10.3bn to $3.2trn at the end of March, according to data from the People’s Bank of China.

Seaman's fund, the Renminbi Bond Fund, hedges all global investments in the portfolio into RMB. Therefore the fund has heightened risk if the currency devalues significantly, as Schroders has recently warned. and Kyle Bass, the founder of Dallas-based Hayman Capital, has repeatedly said that China has a problem much larger than the 2008 subprime crisis (which he predicted and profited from).

"Unfortunately, Western investors probably don’t really understand what’s going on, I am afraid"

"Cheekily I would say, our performance is much better, I think their views are wrong. If you have ever talked to the Chinese authorities and asked them whether or not the currency is overvalued, quite clearly they will tell you, it’s not overvalued and it’s a fundamentally sound currency, and we completely agree with that.

"Unfortunately, Western investors probably don’t really understand what’s going on, I am afraid."

"Actually since January, the RMB has been up against the US dollar and we are expecting it continue to strengthen," Seaman said.

Seaman is expecting the renminbi to appreciate by 2-3% per year over the long term, supported by its current-account surplus and still positive economic outlook. “If the country’s GDP grows at 6.5% a year, does anyone in the world see that as a negative?”

No reason to devalue the RMB?

The sharp devaluation of China’s currency in August 2015 spooked global markets and sparked widespread volatility. Despite the raft of dire analyst predictions that followed, Seaman said his confidence is not shaken, as the Chinese authorities have made it clear that they are not going to devalue the currency further, and there is no fundamental reason to do so.

“If investors listened to what the PBOC [People's Bank of China] has been telling them, they would understand better what’s going on. The problem is not the PBOC has not been communicating well, it’s that the investors are not listening,” he said.

As China shifts from an export-led economy to one based on domestic consumption, it is not sensible to devalue its currency further, Seaman said.

“The global economy is weak. If your currency goes down by 10%, what would your exports have to do for you just to stand still? You have to increase your exports by at least 10%. There’s no point to a devaluation unless you get more export volume.

The biggest risk would be a huge surge in global economy causing central banks to tighten their monetary polciies significantly. The chance for the Fed to happen is close to zero. The world economy is extremely weak and global trade tells you the global economy is extremely weak.

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While the Stratton Street Renminbi Bond UI IDUSD's benchmark is the HSBC China Offshore Renminbi Bond Index, we compare it with the Citi Dim Sum (Offshore CNY) Bond Index and the FTSE Global Government Bond Index over the last three years. 

 

Source: FE Analytics

 

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