How China’s Meltdown Could Lead to Massive Gains
The Chinese government thought it could outwit investors and foreign governments with its overblown economic growth figures, currency manipulation and complex market meddling. But the country’s game of smoke and mirrors is finally coming to an end.
Bearish bets are piling up, and it’s only a matter of time until the house of cards comes tumbling down.
My subscribers and I watched — and profited — as the country’s stock market collapsed in 2015. And just this week, we booked a 36% gain on a bearish trade that was open for only seven days.
China’s currency, the yuan, has been on the decline against the U.S. dollar and other currencies for some time. The currencies of weak countries can lose a tremendous amount of value relative to the currencies of countries with strong economies and less “accommodating” monetary policies (like the United States).
Perhaps the most ironic piece of this story is the fact that, for years, the Chinese government purposefully kept the yuan artificially weak relative to other currencies in order to stoke its export market and drive competition away.
A relatively cheap currency is good for exports because countries with stronger currencies — like the United States — can afford to buy more goods. Big exporting countries like China want to keep their currency cheap so they can sell tons of goods to foreign buyers.
But there’s a point when a country’s economy should be able to grow on its own — without the help of currency manipulation. Many economists saw China’s continued suppression of the yuan as a desperate act that hinted at a weak underlying economy.
Once the country’s stock market started falling apart, investors raised a collective eyebrow. Chinese officials maintained that everything was business as usual, but Chinese stocks continued to slide, casting further doubt over whether the country’s economy was as healthy as its officials claimed.
Eventually, analysts and investors turned to economic proxy indicators — like manufacturing activity, energy usage (the price of oil) and rail cargo rates — for the truth, only to find they showed China’s optimistic growth results were basically a bold-faced lie.
Since then, the People’s Bank of China has finally started lowering GDP estimates for 2015 and 2016. In January, the Chinese central bank forecast 2015 growth will be the lowest in 25 years.
In an effort to quell the contraction, China enacted massive stimulus efforts that included lowering interest rates, buying stocks outright, financing massive infrastructure projects, bond buying and more.
But that may be changing soon.
Chinese President Xi Jinping recently stated the country can no longer rely on these stimulus methods to prop up growth. China’s new five-year plan for economic growth is currently being assembled, and while we don’t yet know the specifics, we do know that the country’s annual GDP target will be 6.5%.
These abrupt changes in policy are a sign that serious forces are pushing government control beyond its limits.
How to Profit From China’s Currency Woes
I can tell you that whatever the country’s new plan is, most experts believe it will involve a very accommodative monetary policy, some sort of stimulus and a very flexible fiscal policy (i.e., lots of spending). All of these signs point to one thing — a weaker yuan.
If China can’t stop its economy from slipping further, the yuan will slip right along with it. Either way, the yuan isn’t looking too bullish from here.
Some of the smartest money in the room believes the yuan, which just hit an all-time low against the U.S. dollar, will continue to weaken, perhaps dropping another 40% against the greenback.
A number of extremely powerful hedge funds and investors — including Kyle Bass’ Hayman Capital Management, David Einhorn’s Greenlight Capital, Stanley Druckenmiller and David Tepper, among others — are quietly building up billions of dollars in bets against the yuan (also called the renminbi). Bass, who successfully called the meltdown in the U.S. housing market, has staked 85% of Hayman Capital’s portfolio on the demise of the Chinese currency.
The obvious trade would be to find the underlying ETF, get short and wait for the payoff…
Unfortunately, with the yuan, it’s not that easy. This currency is highly guarded, illiquid and particularly difficult for the average Joe to invest in. There’s no spot market for the yuan, so forex is out of the question. And while there are a few ETFs that make an effort to track the currency, most don’t directly invest in it, and they are also extremely illiquid.
But there is one little-known, very liquid proxy for the Chinese yuan hidden right under investors’ noses.
I recently recommended a trade in this yuan proxy to readers of my premium newsletter, Profit Amplifier, and we were able to earn a 36.4% gain in seven days. For the record, that’s 1,896.1% annualized. And I’m watching closely for another opportunity.
We did this by using options. But don’t worry, it’s not complicated. In fact, I can teach you everything you need to know about my winning options strategy in just six minutes.