Chinese officials are voicing support for their tumbling currency and intervening to bolster it just as the California-based Pacific Investment Management Co (PIMCO) 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 (韓俊), 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 US dollar will rise against its Chinese counterpart, said Luke Spajic, a portfolio manager in Singapore for the US$1.47 trillion global investment management firm.
“We believe the bullish trend of the US 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 yesterday 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 Thursday last week.
“It is pure imagination that the Chinese yuan will act like a wild horse without any rein,” Han said on Monday in New York.
Short selling “will not succeed,” he said, adding that policymakers are determined to ensure yuan stability.
Investors misunderstood the People’s Bank of China’s intentions, Ma Jun (馬駿), chief economist at the central bank’s research bureau, said in comments on Monday on its Web site.
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 yesterday kept the yuan’s reference rate stable for the third day in a row. The currency fell 0.08 percent 6.5749 per dollar as of 2:44pm in Hong Kong, according to prices compiled by Bloomberg.
The central bank has repeatedly intervened in the offshore yuan market since Monday 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 the central bank is draining the supply of the currency. The overnight Hong Kong Interbank Offered Rate yesterday climbed 53 percentage points to 66.82 percent.
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.
Spajic said PIMCO is not just wagering the yuan will decline.
The report says it is also betting against a basket of other Asian emerging market currencies.
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