A New Yuan Trade: Target Short-Sellers, a Group Says
China’s yuan is depreciating again, and with it the short-sellers are back, betting against the Chinese currency–and vexing China’s economic policy makers in the process.
Now a state-backed association is offering a suggestion to crimp short trading in the offshore market: use the newly established international system for yuan payment. The China Association for the Promotion of Development Financing, which is run by state policy lender China Development Bank, said Beijing should reduce the supply of yuan in the payment system as a way to discourage short-selling.
The payment system–the China International Payment System, or CIPS–was launched last October to process cross-border yuan transactions, as part of Beijing’s efforts to boost global usage of the currency.
After its launch, a big chunk of yuan liquidity was pumped through the CIPS to offshore markets, where the pool of yuan currency is relatively small. In an article published last week in the central bank’s newspaper, Financial News, the China Association urged the People’s Bank of China to use “window guidance” to tell Chinese banks to reduce the amount of the yuan funds available in the offshore market when short-selling arises.
In short-selling, investors borrow a currency and sell it, hoping they can buy it back later at a lower price and return it, pocketing the difference as profits. If the central bank were to cut back the amount of yuan available as the article recommends, the shortage in liquidity would drive up costs for traders wanting to borrow the currency, if they could find any at all.
Asked its opinion of the article by China Real Time, the central bank said, “It’s inaccurate that the People’s Bank of China uses the CIPS to adjust offshore yuan liquidity.” In a statement, the central bank reiterated that it will let markets play a more decisive role and that it’s improving the yuan exchange rate mechanism to make it more market-oriented.
Questions remain, however, whether the central bank employed the tactic the article recommends back in January when the yuan came under attack by global investors betting on rapid depreciation, sending the gap between onshore and offshore markets to its widest ever....MORE