Pimco Defies Bullish China Officials With Bet Yuan to Fall

  • Calls for large decline are `ridiculous,' China official says
  • Pimco says dollar can rise versus yuan over six to 12 months

Chinese officials are voicing support for their tumbling currency and intervening to bolster it just as Pacific Investment Management Co. says the yuan is poised to fall further.

Bets against the yuan will fail and calls for a large decline are “ridiculous,” said Han Jun, the deputy director of China’s office of the central leading group for financial and economic affairs. Another official said investors misunderstood central bank currency shifts last week that send the yuan down.

Pimco is betting the dollar will rise against its Chinese counterpart, said Luke Spajic, a portfolio manager in Singapore for the $1.47 trillion money manager. “We believe the bullish trend of the U.S. dollar will remain intact and that the changes made to the Chinese currency regime portend additional scope for the yuan to weaken over the next six to 12 months,” he said in a report issued Tuesday in Asia.

The divergence highlights the challenge investors face in interpreting China’s decision to reduce the yuan’s fixing rate last week, a move that sparked speculation officials felt compelled to implement emergency measures to stem a slowdown in economic growth. The currency tumbled to the lowest level in almost five years against the dollar on Jan. 7.

“It is pure imagination that the Chinese yuan will act like a wild horse without any rein,” said Han, speaking in New York on Monday. Short selling -- or betting against the currency -- “will not succeed.” Policy makers are determined to ensure yuan stability, he said.

Market Misunderstands

Investors misunderstood the People’s Bank’s intentions, Ma Jun, chief economist at the PBOC’s research bureau, said in comments Monday on the central bank’s website. 

The fixings are based on the previous day’s closing price and changes to the basket of currencies against which the yuan is valued, Ma said. Downward pressure on the yuan will ease after investors absorb a shift to valuing it versus a basket of currencies and away from linking it to the dollar, Ma said.

China kept the yuan’s reference rate stable for the third day in a row Tuesday. The currency fell 0.08 percent 6.5749 per dollar as of 2:44 p.m. in Hong Kong, according to prices compiled by Bloomberg.

The People’s Bank has repeatedly intervened in the offshore yuan market since yesterday to support the currency and crack down on speculators, according to people familiar with the matter.

The cost of borrowing yuan in Hong Kong surged to a record amid speculation intervention by China’s central bank is draining the supply of the currency. The overnight Hong Kong Interbank Offered Rate climbed 53 percentage points to 66.82 percent on Tuesday. The result is that the strategy of borrowing currency and then selling it in the hope that it will fall has become more expensive than ever.

At Pimco, Spajic said it’s not just wagering the yuan will decline. It’s also betting against a basket of other Asian emerging market currencies as China’s growthslows, according to the report.

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