Speculators Fight ‘Big Mama’ Over the Yuan

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

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