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Hong Kong $1.5 Billion Fund Bets 2020 Is ‘Year of the Renminbi’

Hong Kong $1.5 Billion Fund Bets 2020 Is ‘Year of the Renminbi’

  • Gavekal Capital is betting on 10% return in China’s bonds
  • Fund buys Macau casinos as capital controls see easing
Pedestrians walk under lanterns ahead of the lunar New Year in Hong Kong. 

Pedestrians walk under lanterns ahead of the lunar New Year in Hong Kong. 

Photographer: Isaac Lawrence/AFP via Getty Images

Pedestrians walk under lanterns ahead of the lunar New Year in Hong Kong. 

Photographer: Isaac Lawrence/AFP via Getty Images

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The year of the rat, soon to be kicked off after China’s lunar New Year, is lining up to be a strong year for China’s currency and its government bonds.

That’s the bet being put on at Gavekal Capital, a fund manager with about $1.5 billion in stocks and bonds, which says the bonds of the world’s second largest economy will deliver a 10% return this year, given both the strengthening yuan and the relatively high yields in China.

“Where else in the world can you get 10% return on a fairly minimal risk government bond market?” Gavekal Chief Executive Officer Louis-Vincent Gave said in an interview while on a visit to Oslo.

Part of those returns will be driven by the strengthening yuan, which will be stoked by both the easing trade tensions and fallout from the unrest in Hong Kong. The Chinese currency has already climbed about 4% against the dollar after hitting a low in September. Part of the trade deal signed last week in Washington includes commitments by both nations to avoid competitive devaluations.

While the two-page currency chapter was met with skepticism among some currency market watchers, Gave said that the signals out of China are that it’s content with a stronger currency. As the nation also opens up its $45 trillion market this year and Hong Kong unrest persists, China will take further steps to promote the mainland’s financial centers.

This year will “be a very strong renminbi year,” he said. “With the Chinese not only pushing up the renminbi but also opening up capital controls at the same time in a bid to promote Shanghai relative to Hong Kong.”

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Gavekal China Fixed Income Fund returned 4.4% in 2019, according to data compiled by Bloomberg. In the past five years, the fund had an average annual return of 3.6%, beating 80% of its peers.

Signs that inflation is moderating in China could also give the central bank scope to add stimulus this year to cushion a slowdown.

Casinos

In his stock portfolios, Gave is betting on casinos in Macau as capital controls are eased.

“The Macau casinos tend to thrive when the Chinese are allowed to put their money out,” he said. “Because the first place the money goes is the Macau gambling tables.”

His biggest stock holdings are Galaxy Entertainment Group Ltd., Melco International Development Ltd.’ and data center company GDS Holdings Ltd.

GDS is “growing like weeds,” he said. “You’re paying up for the growth but the growth remains extremely strong.”