- Bets on depreciation will suffer huge losses, Xinhua said
- Stable yuan of paramount importance to China, says strategist
The offshore yuan halted a losing streak after China stepped up verbal defense of its currency to ward off speculators betting on depreciation.
Those entering short positions are expected to "suffer huge losses" as Chinese policy makers will take measures to stabilize the exchange rate, according to a commentary on Saturday by the official Xinhua News Agency. Yuan stability is of "paramount importance" as the central bank is refraining from cutting banks’ reserve requirements because such a move could weaken the currency, Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong, wrote in a note Monday.
"The commentary is a very clear message to speculators,” said Sean Callow, a foreign-exchange strategist in Sydney at Westpac Banking Corp. “There could be some further tweaking of limits on capital flows, but in the short term the main tools are likely to be steady fixings plus intervention" as China seeks to prevent sharp declines, he said.
The yuan traded in Hong Kong strengthened 0.1 percent to 6.6083 a dollar as of 4:25 p.m. in London, having retreated 0.4 percent in the previous four trading days, data compiled by Bloomberg show. The onshore exchange rate was steady at 6.5789, according to China Foreign Exchange Trade System prices. The People’s Bank of China strengthenedits daily fixing in Shanghai by 0.02 percent to 6.5557.
Reckless speculation and vicious shorting of the yuan will face higher trading costs, possibly with severe legal consequences as the government improves regulatory mechanisms, Xinhua said. The nation has sufficient resources and policy tools to keep the economic situation under control and deal with any external challenges, it said.
China has no intention of devaluing the yuan and fluctuations in the exchange rate are the result of market forces, the nation’s Vice President Li Yuanchaosaid on Thursday. Shanghai will pioneer the currency’s capital-account convertibility and start a program that allows Chinese individuals to invest overseas at an “appropriate time," Mayor Yang Xiong said at the city’s People’s Congress on Sunday, according to a posting on Weibo.
The CFETS RMB Index, which tracks the yuan against 13 currencies, advanced to 100.84 on Friday, trimming this year’s loss to 0.1 percent. Ma Jun, chief economist at the PBOC’s research bureau, saidthis month that the yuan will be more stable against a basket of currencies but become more volatile versus the greenback as China reforms its exchange-rate system.
China should impose capital controls to defend the yuan rather than keep burning through currency reserves, Bank of Japan Governor Haruhiko Kuroda said on Saturday in Davos, Switzerland. The massive use of the stockpile would not be a particularly good idea, International Monetary Fund Managing Director Christine Lagarde said at the same event. The holdings plunged by a record $513 billion last year to $3.33 trillion.
The central bank said on Jan. 18 it would impose reserve-requirement ratios on yuan deposited onshore by overseas financial institutions from Jan. 25, a move that may increase the cost of short-selling the currency. The ratio will be the same as the 17.5 percent applied on big mainland lenders, according to people familiar with the matter.
— With assistance by Tian Chen