SOFAZ Miscalculates on Chinese Yuan

The State Oil Fund of Azerbaijan (SOFAZ) has miscalculated by starting to invest in the Chinese Yuan a week ago. On July 1, 2015 it made the first investment in the Yuan of the total 3 billion Yuan (US $ 483 million).

SOFAZ overestimated the Yuan and its role in the expansion and diversification of its currency basket. The license from the Central Bank of China for investments of up to 3 billion Yuan was received in 2014 and the relevant contracts have been signed with the Central Bank of China.

The State Oil Fund began investing in the Yuan after June 12, when codes in the Chinese stock market reached a seven-year high; in the past year the market grew by 150%.

However, immediately after that the stock market entered a phase of unprecedented recession. Over the past three weeks indexes fell by 30% (the Chinese companies have lost nearly $ 3 trillion in capitalization). Oddly enough, the collapse has not stopped SOFAZ plans of the next stage of investment considering investment in China's stock market. To this end, SOFAZ plans to obtain a license "competent foreign institutional investors" issued by the Commission on the China Securities Regulatory. This was reported by the Fund officially on July 2 in the midst of the stock market downturn.

The Chinese authorities have taken extraordinary measures to stabilize the situation, according to Vedomosti: liquidity was provided to brokerage firms, IPO at 4 trillion Yuan ($ 645 billion) was suspended and the creation of a stabilization fund of 120 billion Yuan ($ 19 billion) was announced. But after a brief stabilization the market fell again last Monday: the SCI key index fell a further 3.2%.

The occurring reflects the fundamental contradiction of China's economy, the Stratfor report says. The basis of the economic policies of the Chinese authorities is to stimulate domestic demand as the Chinese are encouraged not to accumulate savings, but to spend them, creating a foundation for economic growth. The possibility of investing is however limited with real estate and stocks. Therefore, the real estate bubble inevitably turns into a stock bubble.

The hedge fund Crescat Capital (Denver, USA) is actively selling the Chinese Yuan against the US dollar, since it expects that during the year the People's Bank of China will refuse to peg its currency to the US counterpart, according to Forex. «We believe that the Yuan is very much overpriced," said Kevin Smith, CEO and founder of Crescat Capital. The hedge fund sells the Chinese currency against the dollar by the Put Option. -0-