LONDON, Dec 23 (Reuters) - China's weakening yuan is threatening a reprise of the storm that dominated world markets at the start of 2016, with Beijing's ability to stamp on short-term speculators undermined by a broader consensus among major global investors that the currency will fall.
Hedge funds have been chastened by the squeeze on speculative investors orchestrated by Chinese authorities last January, but many of the underlying pressures on the currency remain and the early signs of tensions to come with U.S. President-elect Donald Trump has upped the ante.
Beijing's ability to hold the currency stable over the next six months may not be in doubt but it will likely spend big again in doing so and, counter-intuitively, the lack of explicit speculation may make the pressure more difficult to defuse this time around.
A year ago, China spent the best part of six months fighting running battles to support the renminbi in the offshore market where the currency is allowed more room to move and which provides a leading indicator for its more tightly controlled onshore version.
Much of that pressure, relieved after Chinese New Year in February, stemmed from Chinese firms closing out "carry trades" based on higher domestic interest rates and the yuan gains that were a one way bet for most of the past decade.
As that effect waned, Beijing was able to quash a group of fund managers, some veterans of the 2008 big shorts of the U.S. mortgage market, who took George Soros-style bets in the options market on officials being forced into a one-off devaluation.
But this time, a number of measures suggest the weaker yuan trade is regarded as both a more certain bet and one supported by a more conservative group of long-term "real money" investors who tend to only jump on bigger consensus trends.
"Being bullish on the dollar as we are, we see the renminbi continuing to weaken next year," said Roger Hallam, who manages $260 billion in exposure as JPMorgan Asset Management's head of currency management in London.
"We are at 6.90 (yuan per dollar) now. If you look at the 3-month forward it says (we will reach) 7.0. So something closer to 7.25 next year is not unreasonable."
Sales desks at banks say major U.S. and European investors have laid large bets in currency options over the past month, with strikes ranging from 7.25 to 8.00 yuan per dollar, coming due in six months to a year.
Goldman Sachs last month made a fall to 7.30 per dollar one of its handful of big market bets for 2017.
Yet in a market where daily moves in the dollar against the euro or yen in the past six months have often topped 1 percent, fund managers say entering at the right time is crucial to making a profit on the yuan's more controlled fall.
Even if the yuan falls to 7.25, that would only be around a 4 percent fall from current levels - a quarter of what the yen has fallen against the dollar in the past five weeks.
James Kwok, head of currency management at France's Amundi, has been betting against the yuan since the dust settled on last January's moves and he thinks it will fall again next year. But he said earlier this month he had cashed out for now.
"We closed our short position in Chinese yuan recently," he said. "I don't think in any single year the currency can go so far when the current account surplus is still there."
Underlying the banks' forecasts and the positions being taken is the confidence generated by Beijing's ability to quell a harder fall in the yuan a year ago.
Authorities there have been open about the need to let the currency depreciate but also stressed they would prevent any kind of disorderly move. So far so good.
But the comparisons to a year ago are also growing. An $87 billion fall in the country's currency reserves in November last year - a sign of the volume of dollars it has to sell to stop the yuan crashing - prefaced drops of $100 billion or more in December and January that spurred selling by foreign players.
This time round, the fall in November was $69 billion, more than double economists' forecasts and a sign the central bank was again weighing in heavily. Further moves to ease stress in yuan money markets have followed.
"There's not the same euphoria as there was in January," says Richard Benson, co-head of portfolio investment with currency fund Millennium Global in London.
"So many people got their fingers burnt and they have clearly been trying to engineer a December calm. For us it is a reasonable opportunity. A slow and gradual depreciation. It's a simple dollar bull trade, played through offshore forwards."
Some of President-elect Trump's noises off on China in the past fortnight - and Beijing's robust responses - have given those with more measured views cause for alarm.
There are signs of stress on debt markets. Since the U.S. Federal Reserve raised rates a week ago, 10-year Chinese yuan bond yields are up almost 40 basis points, while the Turkish and Mexican equivalents are almost flat.
Whereas at the start of this year, there was still appeal for Chinese investors in a booming domestic property market, now Beijing is now also seeking to cool overheated house prices.
"You don't usually think of China being in that pocket of vulnerability," says UBS strategist Manik Narain.
"But this time as the likes of Mexico and Indonesia have settled down China has been definitely been more volatile. It's not clear what the best options for them are but the least painful tool is to intervene in the offshore CNH market and tighten cap controls." (Additional reporting by Sujata Rao and Richard Pace; Editing by Toby Chopra)