Hedge Funds Used to Love Betting Against China. Now, Not So Much

(Bloomberg) -- A sharp devaluation. A credit crisis. And an economic hard landing.

That’s what some of the biggest names in the hedge fund industry were predicting for China after the nation’s stocks and currency tumbled in 2015.

Two years later, it hasn’t worked out quite the way pessimists anticipated. Bets on a devaluation have fizzled as the yuan rallied nearly 7 percent from its eight-year low against the dollar in December. Chinese credit markets have stabilized, while the nation’s equities are back in a bull market.

How have the bears responded? A few, like Crescat Capital’s Kevin Smith, are still holding out for a crash. But as a group, they’re less pessimistic now than they were in the wake of China’s 2015 market turmoil. Some, including Mark Hart of Corriente Advisors, have even turned bullish.

Here’s what the managers are saying these days:

Kyle Bass

Then: The founder of Hayman Capital Management was one of the hedge fund industry’s most outspoken China bears, saying in June 2016 that the country had “the largest macro imbalance in world history.” Bass, who made a fortune betting against U.S. subprime mortgages, said losses in Chinese banks could be four times bigger than those suffered by American lenders during the global financial crisis. He predicted the yuan would fall more than 30 percent.

Now: While Bass declined to comment for this article, his recent remarks suggest he hasn’t changed his mind. In May, he said swelling assets in China’s wealth management products were another sign of a looming credit crisis. Bass told Reuters in June that he’s still short the yuan because China’s credit problems are “metastasizing.”

Mark Hart

Then: Hart, who partnered with Bass on the subprime mortgage wager, first started betting against the yuan in 2009. By January 2016, he was arguing that China should weaken its currency by more than 50 percent.

Now: After losing about $240 million on his yuan wager, Hart has changed his mind. He’s now bullish on China, saying in a recent interview that the nation’s currency has scope to strengthen. He declined to comment on specific investments and said he’s no longer trading the yuan.

Crispin Odey

Then: The London-based founder of Odey Asset Management, who successfully positioned for China’s 1.8 percent yuan devaluation in August 2015, predicted later that year that the exchange rate would slide by at least 30 percent.

Now: Odey has moderated his views -- somewhat. He’s shorting metal stocks on expectations that China’s economy will slow in the second half. But he says betting against the yuan is no longer worth the trouble.

“They can control their currency very easily,” he said in an Aug. 8 interview, citing China’s massive current-account surplus. “It’s not really worth fighting very much.”

Kevin Smith

Then: The founder of Crescat Capital said a month before the 2015 devaluation that the yuan was “massively overvalued” because of China’s “extreme” economic imbalances.

Now: Smith is sticking to his bearish bets via currency options and short positions in Chinese stocks, even after his macro fund lost about 12 percent so far this year. He said last month that his “mid-target” for the yuan is a 70 percent plunge over the next year.

John Burbank

Then: The chief investment officer of Passport Capital said in late 2015 that a hard landing in China could trigger a global recession. In May 2016, he called for a major yuan devaluation.

Now: Burbank hasn’t publicly commented on the yuan for a while, but a July 31 investor letter seen by Bloomberg News suggests his views on China have moderated.

While he predicted China’s restrictions on housing and credit this year will be “detrimental” for commodity demand in the second half, he said the government still seems to be boosting the economy.

“Recent economic data has in fact been supportive of a continuation of strong growth near-term, with a slowdown possibly pushed to 2018,” Burbank said.

Douglas Greenig

Then: The founder of Florin Court Capital said in June 2016 that China might devalue its currency in the wake of market turmoil sparked by Britain’s vote to leave the European Union.

Now: Greenig said in early August that his fund’s quantitative model, which studies technical and pricing data, had switched to favoring the yuan.

“Locals could sell more currency, but foreign inflows may offset that,” he said in a phone interview.

--With assistance from Saijel Kishan Katia Porzecanski and Nishant Kumar

To contact the reporter on this story: Justina Lee in Hong Kong at jlee1489@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Michael Patterson