Die-Hard Yuan Bull Slams Bears Banking on Dollar Revival

  • Seaman at Stratton Street betting Trump pivot to bolster yuan
  • China’s currency still up in 2017 despite dollar’s resurgence

Andy Seaman has a message for yuan bears: Get over it.

China’s currency is on an upward trajectory and those not positioning for gains will lose out, says the London-based manager of Stratton Street Capital’s Renminbi Bond Fund. Investors fixated on the yuan’s three-year pullback are “obsessed with the past” and will see their performance lag as dollar weakness and resurgent growth in China bolster the yuan.

“If people were looking forward, they would be figuring out how to get their renminbi exposure,” Seaman said in a phone interview, using the yuan’s official name. “It would be bizarre if international fund managers didn’t hold a significant amount of assets in one of the world’s most important economies.”

Bullish on the yuan since 2007, Seaman’s optimism hasn’t always been rewarded. He predicted a year ago that the currency would strengthen - instead, it racked up its worst annual slump in more than two decades on concern over China’s economy and as the dollar gained on the Federal Reserve’s tightening plans. While his optimism continues to clash with the consensus view among analysts -- which is for the yuan to drop 2.8 percent versus the greenback this year -- he’s one of the world’s best performing money managers, and has the record to show for it.

Seaman’s flagship bond fund has returned an annualized 6.7 percent in dollar terms over the past five years, beating 94 percent of its fixed income-focused peers, according to data compiled by Bloomberg. His returns this year exceed those for 99 percent of funds.

The combination of Chinese capital controls and a retreating greenback helped the yuan rally 0.6 percent this year, a promising sign to Seaman after its sustained declines. Despite these early gains, however, analysts continue to err on the side of bearishness, with the yuan predicted to fall along with most other Asian currencies in 2017, data compiled by Bloomberg show.

Strategists including Danske Bank A/S’ Allan von Mehren, the most accurate forecaster on the yuan last quarter, expect outflows from China to continue and for further interest-rate hikes anticipated from the Fed to revive the dollar. The greenback’s renewed sensitivity to Fed rhetoric this week, and its jump versus major peers, support that outlook.

Trump Factor

For Seaman, Donald Trump will be key to the yuan’s continued good fortunes.

The new U.S. president, who’s vowed in the past to designate China as a currency manipulator, will be forced to abandon his strong-dollar policy as it’s inconsistent with the message he’s conveying to other countries about their own exchange rates, Seaman said. The fund manager’s view, shared by others including Pacific Investment Management Co., is that Trump’s fiscal stimulus could spur the Fed to tighten to a point where the U.S. economy starts to slow, crimping the dollar and fueling yuan gains.

China’s currency will appreciate an average 2 to 3 percent versus its trade-weighted currency basket every year for the next decade, Seaman said, adding that China maintaining a current-account surplus will be supportive.

“The only time I would become concerned about the renminbi is if the central bank were to turn around and say we no longer want to keep the currency stable against the basket,” he said. “For now, it’s very clear from the regulator’s rhetoric that stability is the order of the day.”

Bad 2016

With his Renminbi Bond Fund, Seaman buys investment-grade dollar debt from issuers across Asia, gaining exposure to the yuan by purchasing an equivalent amount of forward contracts. Because the Chinese currency is priced at a discount in the forwards market, the fund benefits from what’s known as positive carry. It has returned 5.7 percent this year, while the offshore yuan traded in Hong Kong has strengthened 1.1 percent.

While Seaman is sticking to his bullish view, he’s been burnt before. The fund posted the second-worst performance since its inception last year, with the yuan sliding 6.5 percent and the People’s Bank of China draining its foreign-currency stockpile to stabilize it. The current calmness in the yuan is also being tested as the dollar rallies amid bets the Fed will boost borrowing costs this month.

Danske Bank’s von Mehren predicts the yuan will shed another 4.2 percent in 2017 as concerns over China’s hefty debt load raise the risk of a financial shock in the next three to five years. “Also, I’m fairly bullish on the U.S. economy,” he said.

Seaman says there’s a bias in the market against a strengthening yuan, and that makes it harder for him to sell the Renminbi Bond Fund even though he says it’s his best performer.

“There’s a such a negative perception,” Seaman said. “Where we are headed is a world where people hold a significant amount of renminbi assets in the same way that they are holding a significant amount of euro, sterling and dollar assets.”

— With assistance by Tian Chen

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