Big Mama—the Peo­ple’s Bank of China—isn’t ready to cut her apron strings

The Peo­ple’s Bank of China flexes its mus­cle in the cur­rency mar­ket “They wanted to say, ‘Who’s the boss here?’ ”

Bloomberg Businessweek (Asia) - - CONTENTS -

Cur­rency spec­u­la­tors are pil­ing on bets that the Chi­nese yuan will weaken. And a bruis­ing bat­tle in Jan­uary with the Peo­ple’s Bank of China, the coun­try’s cen­tral bank, hasn’t de­terred them.

Among the re­cent bears are big hedge fund man­agers in­clud­ing Bill Ack­man of Per­sh­ing Square Cap­i­tal Man­age­ment and Kyle Bass of Hay­man Cap­i­tal Man­age­ment. Prices for op­tions trades show the mar­ket ex­pects the yuan to fall a lot fur­ther, and 39 of 45 strate­gists tracked by Bloomberg say the cur­rency will drop against the dol­lar by yearend.

Bill Gross, man­ager of the Janus Global Un­con­strained Bond Fund, has com­pared the yuan trade to in­vestor Ge­orge Soros’s cam­paign against the Bri­tish pound in 1992. In that episode, the Bank of Eng­land ul­ti­mately gave up de­fend­ing the value of its cur­rency and al­lowed it to fall. Soros is now a China bear, too.

The PBOC—some­times called Yang Ma, loosely trans­lated as “Big Mama”—seems de­ter­mined to show that it will hang tough. In mid-Jan­uary, it launched a two-day at­tack to prop up the yuan and force losses on spec­u­la­tors. “They wanted to say, ‘Who’s the boss here?’ ” said Fred­eric Neu­mann, co-head of Asian eco­nom­ics re­search at HSBC Hold­ings.

Chi­nese of­fi­cials are us­ing mil­i­tary analo­gies to de­scribe the cen­tral bank’s ac­tions. Wang Yong, an aca­demic at the PBOC’s train­ing school, urged pol­i­cy­mak­ers to gird for a “tough bat­tle” and for the govern­ment to stock up on grain, oil, and gold.

The bank, which closely man­ages the yuan’s value against for­eign cur­ren­cies, hasn’t been dead-set against let­ting the cur­rency fall. It shocked mar­kets in Au­gust with a sur­prise de­val­u­a­tion and with an­other mark­down in Jan­uary. With growth in the coun­try slow­ing, a cheaper yuan can even be help­ful be­cause it boosts ex­ports by mak­ing them cheaper. But a fast, volatile de­val­u­a­tion could ex­ac­er­bate the re­cent flight of cap­i­tal out of the coun­try. And there’s the mat­ter of con­trol: The bank doesn’t want to cede power over the cur­rency to spec­u­la­tors.

The PBOC can sell yuan when it wants it to fall, or use a por­tion of its more than $3 tril­lion in for­eign cur­rency re­serves to buy yuan when it wants it to rise. As 2016 be­gan, the PBOC asked Chi­nese banks and state-owned com­pa­nies in Hong Kong to pro­vide de­tails on who was plac­ing or­ders to short the yuan—that is, bet on it fall­ing. It was part of a plan to dis­cour­age spec­u­la­tors, ac­cord­ing to peo­ple fa­mil­iar with the mat­ter. The strat­egy didn’t al­ways run smoothly. On Jan. 6 the PBOC set the yuan’s daily tar­get rate against the dol­lar at the weak­est level since April 2011. The cur­rency tum­bled in Hong Kong, where it trades more freely than on the main­land, and those who’d been bet­ting against the yuan were be­ing proved right.

The cen­tral bank stepped back in to sup­port the yuan and then made a pin­cer move against the shorts. First, it told Chi­nese banks to limit off­shore loans in yuan, mak­ing the cur­rency harder to get and to short. Then the PBOC went in hard, buy­ing enough yuan in Hong Kong to spark a record

surge in the city’s money-mar­ket rates.

“The mar­ket went into panic mode,” says Ryan Lam, head of re­search at Shang­hai Com­mer­cial Bank. On Jan. 12 the in­ter­est rate to bor­row yuan spiked overnight to al­most 67 per­cent, al­most five times the pre­vi­ous high. (It has since set­tled back to 1.2 per­cent.)

Ac­tion was ac­com­pa­nied by jaw­bon­ing. In New York on Jan. 11, Han Jun, the deputy di­rec­tor of China’s of­fice of the cen­tral lead­ing group for fi­nan­cial and eco­nomic affairs, told re­porters that bets against the yuan would fail. “It is pure imag­i­na­tion that the Chi­nese yuan will act like a wild horse with­out any rein,” he said.

In­side the PBOC, of­fi­cials view the Jan­uary cam­paign as a suc­cess and vow to do it again if needed, ac­cord­ing to peo­ple fa­mil­iar with the mat­ter. And not ev­ery­one in the mar­ket is bear­ish on the yuan. The flip side of a weak yuan is a strong dol­lar, which has been buoyed by U.S. eco­nomic strength. Ja­son Schenker of Austin-based Pres­tige Eco­nom­ics says that could soon change. “The odds that the Chi­nese econ­omy will im­prove be­fore the U.S. does are pretty high,” he says.

De­fend­ing the cur­rency has costs: China’s re­serves, once a con­tin­u­ously ris­ing hoard, fell by al­most $100 bil­lion in Jan­uary. Some ar­gue the PBOC’s ap­proach runs counter to the govern­ment’s aim of mak­ing the yuan a global

cur­rency. “In­vestors may read th­ese ac­tions as an in­di­ca­tion of de­spair, that the sit­u­a­tion may be worse than what ap­pears on the sur­face,” says Ali­cia Gar­cía Her­rero, an econ­o­mist at Natixis in Hong Kong.

The bot­tom line The PBOC won a skir­mish against cur­rency spec­u­la­tors in Jan­uary but may have to set­tle in for a long fight.

“It is pure imag­i­na­tion that the Chi­nese yuan will act like a wild horse with­out any rein.”

�Han Jun

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