China central bank blames speculators for attacking the yuan

China’s central bank governor has blamed “speculative forces” for attacking the country’s currency and said there was no basis for the yuan to keep depreciating, as anxiety rose about the outlook for the world’s second largest economy.

Zhou Xiaochuan of the People's Bank of China made his comments days after Kyle Bass, the US hedge fund manager who correctly predicted the 2008 subprime mortgage crisis, said he thought China was heading for financial chaos because of rapid credit expansion in the banking system, a situation that reminded him of Ireland's financial collapse.

Chinese markets reopened on Monday after the weeklong Lunar New Holiday but early indicators for the economy were not promising.

In data released on Monday, China notched up a worse trade performance than expected in January, with tumbling exports overshadowed by an even bigger slide in imports, saddling the world’s largest trading nation with a record trade surplus of $63.3 billion (€56.5 billion).

China’s exports fell 11.2 per cent on-year in January, while imports declined 18.8 per cent, much higher than forecast. Imports fell for the 15th month in a row.

Exports to the EU, China’s second biggest market, were down 12 per cent, according to data from the customs office, while China’s exports to the US, its biggest market, fell 9.9 per cent in dollars in January from a year earlier.

“International speculative forces have recently focused on shorting China,” Zhou told Caixin magazine.

Depreciation pressure on the yuan is putting pressure on the central bank to introduce more economic stimulus measures over the near-term, and efforts to defend the yuan have eroded China’s foreign currency reserves as the central bank dumps dollars to buoy the yuan.

Billionaire investor George Soros has been attacked in the Chinese media as a "robber baron" for saying he planning to short-sell the yuan.

In January, reserves plunged by $99.5 billion (€883 billion) as the People’s Bank of China sold dollars in an effort to shore up the value of the yuan. It was the third straight month that foreign reserves fell. However, Zhou insisted currency reserves were not declining too fast.

“It is normal for foreign reserves to rise and fall as long as the fundamentals face no problems,” he said.

He also said that yuan exchange reform would help the market be more flexible in dealing with speculative forces, and that China would keep the yuan basically stable versus a basket of currencies while allowing greater volatility against the US dollar.

Zhou said Beijing needed to prevent systemic risks in the economy, and prevent “cross infection” between the share, debt and currency markets.

China reported economic growth of 6.9 per cent for 2015, its weakest in 25 years, and money is flowing out of China as investors seek higher returns elsewhere.

There are worries that a rapid devaluation of the yuan currency could destabilise the economy.

In a notably bearish note to investors last week, Bass wrote: “China’s current situation reminds us of Ireland and Spain, where construction, real estate, and infrastructure investment activity constituted a disproportionate share of economic activity, government revenue, and bank lending.”

A cyclical downturn in these sectors would have a similarly profound impact on the Chinese economy, Bass said, especially given Chinese residential real estate investment as a percentage of GDP, which peaked in 2013, was the second highest in global history.

He believes China’s banking system will suffer a loss four times greater than that suffered by US banks during the great recession.