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?’ ”

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