Should Hedge Funds Withdraw from China

China stock market

China Focused Hedge Funds had worst monthly performance this July in last seven years. The HFRI Index for China, which tracks hedge funds that predominantly invest in China, declined by 7.77% in July, worst monthly performance since January 2008. Hedge funds suffered around $10 billion in outflows in July after Chinese market collapse. The problems in financial markets have further multiplied with sudden devaluation of Chinese Yuan in August. The Chinese economy is also slowing down.

Should Hedge Funds withdraw from China? Let us have a closer look on the current issues and economic outlook for China.

Chinese Yuan’s Devaluation brings uncertainty

On August 11, the Chinese central bank came out with a new exchange rate formation system. According to this, the Yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day in the spot foreign exchange market. The central parity is based on the previous day’s close, foreign exchange supply and demand and the rates of major currencies. This is a step forward to make Yuan more market driven.

China cut the value of its currency for three consecutive days taking the reductions to around 4 per cent this week.