China: More Investors Ask, Why Not Short the Yuan?

By staff reporter Huo Kan and Washington correspondent Zhang Tao 08.01.2011 17:29

Crisis theorists and others are wagering that the Chinese currency will veer from its long appreciation path against the dollar

Plenty of smart money is betting on the rise of the yuan, but some overseas foreign exchange investors are looking the other way.

Contrarians range from hedge funds to wealth management firms, and they generally agree that the possibility of yuan devaluation against the U.S. dollar is at least slightly greater than market consensus. Chinese policymakers, meanwhile, are not rushing to argue the point.

"We are indeed shorting the yuan," investment manager Cullen Thompson of the New York firm Bienville Capital Management LLC told Caixin.

Thompson is joined by Mark Hart, investment chief at the Texas-based hedge fund Corriente Advisors, which launched its China Opportunity Master Fund to play against the Chinese currency and economy in general.

Hart said he expects to profit from an economic slowdown in China, telling investors last year that, in his opinion, the Chinese government's artificial exchange rate controls and low interest rates have created asset bubbles in areas such as real estate and bank credit, and that a downturn will follow.

Mainstream market opinion is still bullish on the yuan, but prices for yuan put options on overseas markets have risen slightly in recent weeks, indicating an increase in yuan-shorting transactions.

Some investor bets against the yuan can be blamed on China's decision to let the yuan appreciate in recent years through exchange rate reform, as well as market worries about the health of the Chinese economy.

Since China's exchange rate reform began in July 2005, the yuan has appreciated 22 percent against the U.S. dollar.

The best solution is not Patrick Buchanan suggests, but a MAJOR reform of the income tax system in the USA.

This is why we should adopt the Steve Forbes flat-rate income tax starting as early as the 2012 income tax year. When the Forbes tax plan has these advantages:

1. Exempts the first US$13,000 per adult (in a two-adult household) and US$9,000 per child of income (e.g., US$44,000 for a family of two adults and two children) of earned income from income, which right there untaxes the poor.
2. Eliminates all the other complicated credits, deductions, exemptions and preferences in the current tax code that ends up costing over US$300 BILLION per year in compliance costs, freeing up over US$200 BILLION per year for more productive economic activity.
3. Eliminates the complications of alternate minimum tax, estate tax, and additional taxes on high income earners.
4. Eliminates including bank account interest, capital gains and stock dividend payments as part of earned income. This would drastically slow down the practice of "offshoring" millions of jobs, thousands of factories, hundreds of corporate headquarters, and possibly as high as US$14 TRILLION in American-owned liquid assets for income tax avoidance reasons. That means lower unemployment and our banks will have enough liquidity to issue loans and lines of credit so necessary for business expansion.
5. With no more bank account interest being taxed, it encourages American residents to create their own financial "nest eggs" for retirement and medical bills tax-free, allowing us to wind down both Social Security and Medicare.

So what are we waiting for? I'm surprised that no country has adopted the Forbes tax plan, because it would result in an economic boom to that country. Can you imagine what would happen to a country like Brazil if they were to adopt such a business-friendly income tax system?

they have highly leveraged banks

Which lent huge money for all those public works and building construction frenzy. These activities, in turn, account for sizable portion of China's GDP growth.

Old fashioned bubble, which is created without CDS or any exotic financial devices, nevertheless can bring economy to hell.

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