#worldnews #CarryTrade #Yuan ⠀
👉 What is the danger of the Chinese carry trade
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The sell-off in the world markets caused by the refusal of carry-trade deals with the Yen has attracted attention to the Chinese yuan. Speculators are sure that carry trades with the yuan will soon be profitable.
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During the Yen carry trade, speculators borrowed cheaply in Yen, sold it for USD, and received income on dollar instruments - either through money funds or treasuries. Some even included leverage to buy stocks or crypto.
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It is more complicated with the yuan, as this currency is not fully convertible• Loans are taken in domestic yuan (CNY).
• CNY must be converted into offshore yuan (CNH).
• CNH is converted to USD, which is a procedure that is not easy, strictly limited, and not available to everyone.
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Three scenarios are possible for the Chinese curry trade:• Chinese exporters keep their proceeds in dollars;
• foreigners borrow yuan to invest in mainland markets;
• curry trades use cheap offshore yuan to buy dollar-denominated bonds and other currencies.
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For almost all of 2024, the CNH traded at a marked discount to the CNY – a sure sign that smart money was actively selling CNH to invest in U.S. securities.
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Since July 24, the yuan has begun to strengthen, volatility has increased sharply, and on Monday morning, CNH strengthened much faster than CNY. It seems some are not too bothered by China's restrictions on capital flows.
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China's economy is hanging on to a trade surplus, but a strengthening yuan could jeopardize that surplus by making Chinese goods more expensive in global markets. China's curry trade will wind down once China's domestic demand recovers and exporters are forced (or forced!) to convert dollars back into yuan. Given the potential key rate cut in the U.S., this has the potential to cause fluctuations in the Chinese currency.
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So, let's be sensible and not take any unnecessary risks.
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Profits to y’all!