Don’t be stupid.
That’s the message to yuan traders around the world the Chinese government just published in state media outlet, Xinhua.
Stupid, to the Chinese government in this context, simply means having the nerve to short the yuan, the country’s currency.
The yuan has been depreciating in value steadily since December, becoming a source of volatility in global markets. This runs counter to the government’s desire to let the currency stabilise.
That’s why, in an editorial written by a known alias of the Chinese government, authorities told the shorts to drop dead [emphasis ours].
Some people believe that the Chinese capital market is experiencing a major crisis, of which they try to take advantage with speculative actions and even vicious shorting activities.
The latest example is that some radical speculators tried to short sell the Chinese currency yuan, which has been depreciating against the U.S. dollar recently. However, with the Chinese monetary authority taking effective measures to stabilise the value of the yuan, those speculators are expected to suffer huge losses.
The Chinese economy is transitioning from one based on investment, to one based on domestic consumption. Old industries, like manufacturing and property, are declining and the economy is slowing. This has put pressure on the yuan at a time when the government wants to portray stability.
Authorities see this as a temporary phase in China’s economic development — one in which the market’s free hand cannot be allowed to guide the economy quite yet. That’s why they’re warning currency traders to back off and stop selling the yuan.
The editorial frames this as a longterm bet no investor would want to lose:
A smart, far-sighted investor would seize the opportunity arising from China’s economic restructuring, and achieve a win-win outcome by investing in China’s future and reaping the fruits of China’s reform and robust new economy.
As for those who want to bet on the “ultimate failure” of the Chinese economy, they should look back at the past four decades, which witnessed China’s growth from an underdeveloped economy into a global economic powerhouse through continuous reform and opening up.
Not a threat, a promise
China isn’t kidding about what it can do to traders either. Earlier this month we saw what happened when the government decided to run yuan shorts out of the market — the shorts got killed.
First, a primer: There are two kinds of yuan — the onshore yuan, which is controlled by the government, and the offshore yuan, which floats more freely in the market. The spread between the two yuan has become a source of global volatility. It shows the market that the onshore yuan either is or is not fair value — that the government is or is not manipulating price.
During the week of January 12, China said no more, and went into the offshore market, which is mostly traded in Hong Kong, and bought up a ton of yuan. That drove the cost of borrowing yuan up sharply.
Liquidity dried up. The Hong Kong Interbank Offering rate, or Hibor — the benchmark rate at which banks will lend to one another — shot up from 4% to 66.8% in 2 days. The shorts were murdered.
“It looks like PBoC wants to maintain a high cost of shorting CNH,” Zhou Hao, Asia economist at Commerzbank in Singapore, told The Financial Times.
Yuan shorts, you’ve been warned. This is not your market.