China's central bank delivers on its threat to speculators by driving up the Yuan

Photo: Greg Bowker – Pool/ Getty.

If there was further proof needed that the China’s Yuan should be weaker, then today’s incredibly weak trade data for January should do it.

Yet instead China’s central bank, the PBOC, pushed the reference rate down to 6.5118 against the last close at 6.5755 before the Lunar New Year break. After the data was released the Yuan kept rallying down to 6.49 – its strongest level against the US dollar this year.

That move only represents an appreciation of around 0.95% against the US dollar in a week where the net of incredible USDJPY volatility saw the Yen strengthen around 6%. But today’s move is an important, if somewhat symbolic, victory for the PBOC in its battle against market forces trying to push China’s central bank into a large devaluation.

Official USDCNY rate and unofficial USDCNH rate daily (Reuters Eikon)

Over the weekend in an interview with Caixin, PBOC governor Zhou Xiaochuan warned speculators that a weaker Yuan was not inevitable.

The FT reports that Zhou said “It is normal for foreign reserves to rise and fall as long as the fundamentals face no problems. At the moment the level of cross-border capital flows is within the normal region.”

He also said “we need to differentiate between capital outflow and capital flight.”

Zhou added that with a trade surplus of $US600 billion in 2015 and net exports making a positive contribution to GDP growth, “there’s no motive to depreciate the renminbi for the sake of net export expansion.”

But he was also honest about the PBOC omnipotence, or lack thereof.

“The central bank is neither a god nor a magician, there is no way that we can wipe out all uncertainties. Sometimes, the central bank has to say, ‘Sorry, we have to wait for new data’,” he said.

His message to the hedge funds lined up against the PBOC was more blunt.

“China will not let market sentiment be dominated by these speculative forces,” he said.

Today, he carried through on that warning.

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