China advised traders against shorting the yuan, after a recent slide took the currency to the brink of the critical 7 per dollar level.
Guo Shuqing, head of China’s banking and insurance regulator, said in a speech that speculators "shorting the yuan will inevitably suffer from a huge loss.” The speech, delivered by a spokesman for the agency on Saturday in Beijing, also included comments on the trade war, making Guo the highest-level financial official so far to publicly comment on the issue since tensions between China and the U.S. escalated this month.
The broadside comes as bearish sentiment on China’s currency ratchets up, thanks to trade tensions and signs of a stuttering economy. The offshore yuan has weakened about 2.6% versus the dollar this month, while a gauge of traders’ willingness to bet on further declines has surged to the highest level among Asian currencies.
When it comes to burning speculators, China has a good track record. In January 2017, when officials grew upset about the yuan’s weakness, they choked cash supply in Hong Kong and sent the currency’s deposit rates to record highs. A stampede of bears followed suit, fueling a 2.4 percent spike in the offshore yuan within two days.
Traders have turned more bearish on the yuan in recent weeks. The offshore currency’s three-month risk reversal -- which measures the extra cost of bearish options over bullish ones -- has increased five-fold this month, according to data compiled by Bloomberg.
China doesn’t want “too crowded trades” betting on a one-way movement of the yuan, as its main concern is growth and a stable yuan is important to achieving it, Alicia Garcia Herrero, chief economist for Asia Pacific with Natixis wrote in a note last week. Should investors speculate on one number, the central bank is likely to make them pay as it has done so in the past, according to the note.
The central bank can use instruments ranging from Counter-Cyclical Factor in the yuan’s fixing exchange rate to reserve requirements for yuan deposits offshore to defend the currency, according to Bloomberg economists David Qu and Chang Shu.
In the speech, Guo also said the yuan’s weakness caused by the trade war makes the U.S. government worried about the diminishing effects of higher tariffs. The speech also said it was "ridiculous" that developed countries have long asked for more currency flexibility, but when the yuan’s rate become more market oriented, some of them showed fear.