Beijing’s squeeze on yuan doubters sends a bearish signal. The People’s Bank of China has reinstated a rule making it more expensive to short the currency. Policy-makers might slow the slide, but the move also telegraphs where they think the yuan is heading. That will encourage outflows and complicate efforts to support economic growth.
China’s central bank said on Friday it wanted lenders to hold 20 per cent of foreign exchange forward positions as reserves, reviving a measure last deployed in July 2017. At the time, higher costs probably deterred some shorters, but the renminbi — the currency’s official name — still went on to lose around 5 per cent between August and December. The PBOC scrapped the rule the following year, when the yuan showed signs of overheating. Now, it’s back.
Officials hate the sight of people making money on bad news about China, seen as a sideways indictment of the Communist Party’s economic competence. When US investor Kyle Bass, in 2016, predicted the yuan would fall 30 per cent, Beijing rallied its banks to fend off what domestic media described as a US conspiracy. Using a mixture of capital controls and market meddling, they crushed the shorters.
But intervention is a double-edged sword. When state-owned banks fight the market on Beijing’s behest, their financial firepower makes them impossible to resist. But their very presence shows the government believes the currency would otherwise fall further. While slowing the rate of decline buys time, it can be a self-fulfilling prophecy. Indeed, the PBOC likes to draw arbitrary lines and to defend them, before retreating gradually while tightening controls. All of this encourages those with dollar-denominated debt to hurry repayment, increasing outflows in turn. Last time, they drained $1 trillion from China’s hard currency reserves. It’s hard to encourage productive investment in such an environment.
The trade war has clearly rattled local investors, and the yuan is starting to fall out of sync with the greenback — a sign of a potential herd movement out of the currency. The dollar index has flattened out since mid-June, but the renminbi has fallen over 6 per cent since then, nearly crossing 6.9 per dollar Friday, before banks stepped in again. The PBOC might not want anyone to profit from betting on the obvious, but that’s hardly reassuring.