Yuan gap widens again as depreciation bets swamp PBOC fightback

The gap between the Chinese yuan’s exchange rates at home and abroad expanded to the biggest in three weeks, a sign that international traders are reviving bets against the currency after getting burned by the central bank earlier this year.
The yuan traded in Hong Kong fell as much as 0.4 percent, taking its discount to the currency in Shanghai to 1.1 percent. That’s the most since Jan. 11, when the People’s Bank of China launched a two-pronged attack on short-sellers by mopping up the currency overseas and choking supply of yuan from the mainland. The assault pushed the offshore rate to a premium that week, before it swung the other way again.
“Bears are not giving up on shorting the yuan simply because of the PBOC’s attacks, and they are preparing to return to the game,” said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong. “There will be a very intense confrontation between short-sellers and the PBOC in the near term. While the market strongly believes there’s room for further declines, the central bank will try its best to keep the yuan stable.”
The offshore yuan fell 0.25 percent to 6.6444 a dollar as of 6:20 p.m. in Hong Kong yesterday, data compiled by Bloomberg show. It earlier dropped to 6.6512, the weakest since Jan. 11. The onshore currency was little changed at 6.5779. The monetary authority lowered its daily fixing by 0.02 percent to 6.5521. Chinese financial markets will be closed next week for the Lunar New Year.
The pessimism is showing in the options market, where the extra cost for three-month contracts to sell the yuan against the dollar in Hong Kong over contracts to buy jumped in January by the most since 2011.
This comes even though Chinese authorities applied stricter capital controls to scare off speculators and curb arbitrage between the yuan’s onshore and offshore rates. The nation has increased scrutiny of funds being transferred overseas and limited advance foreign-exchange purchases for overseas investments. In a commentary yesterday, the official People’s Daily newspaper said that yuan bears who foresee a hard landing are either selectively blind, being jealous or serving their own needs.
The nation’s economy is growing at the slowest pace since 1990, an estimated USD1 trillion of capital flowed out last year and stock markets in Shanghai and Shenzhen are in the midst of a renewed sell-off.
“Markets remain very bearish on China and are not confident that the authorities can fix the problems of yuan depreciation and capital outflows,” said Ken Cheung, a Hong Kong-based strategist at Mizuho Bank Ltd. “Selling the offshore yuan will remain the best proxy to execute a short-China strategy.” Bloomberg