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Hugh Hendry: major Chinese devaluation would be disastrous
Hedge fund manager says diplomacy and economics would suffer if China seeks to regain competitiveness through its currency.
China could potentially ‘destroy’ global manufacturing if it seeks to regain growth through further weakening its currency, hedge fund manager Hugh Hendry has warned.
In his latest market outlook, Hendry, who is founder of Eclectica Asset Management, said currency moves similar – or even beyond – what the Chinese undertook last summer and last month would cause major ructions in global markets.
‘What could, should and is troubling the world is the potential for a substantial devaluation of the yuan: this would surely have disastrous outcomes for global diplomacy and economics,’ said Hendry.
‘China has already accumulated a large and growing share of global trade. A major devaluation would see this share expand further with the possible result of completely destroying manufacturing outside of China,’ he added.
Hendry said this was purely a theoretical fear at this stage but, given the unexpected nature of some Chinese government policies, it could not be discounted. ‘Even apportioning a small possibility to such an event has a significantly detrimental impact on the global economy via a reversion to protectionism and insular politics.’
A knock-on effect, Hendry said, was further extremist politics in the western world could come to the fore in response to the inevitable global downturn which a devaluation would cause. ‘At worst, we could see a mini-dark age of rampant protectionism, global trade coming to a halt, a significant decline in immigration and even restrictions on overseas travel.’
Hendry said this was the ‘extreme bearish’ view and one which would completely ruin the investment case for risk assets like shares. While Hendry did not expect it to happen, he said it would not be wise to discount it entirely.
One of the major reasons for this overarching concern, Hendry said, was the fact China has neither committed to full free-market economics and yet not overtly retained its fully-managed model. He said this had left many investors in an awkward middle ground.
‘In our minds the question is not one of capital flight but the extent to which commercial hedging of foreign trade has been brought into line. That is to say, to what extent Chinese exporters now hedge their overseas revenues into yuan?’ he said.
Awareness of how bad things could get did not mean Hendry was taking cover. Instead, he said he was exploiting the surge in investors' risk aversion with investments that played on the recoveries in Europe and Japan. He said the knowledge his team had gleaned from years of trading Chinese bonds would continue to serve them well.
The CF Eclectica Global Macro fund has returned 7.5% in sterling terms over the three years to the end of December 2015. This compares to a return of 5.68% by the average manager in the Alt Ucits – Global Macro sector over the same period.
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