A high-stakes battle between China’s central bank and speculators taking aim at the renminbi escalated last week with US hedge fund manager Kyle Bass’s starkly worded letter to investors predicting a Chinese debt and currency crisis.
Zhou Xiaochuan, People’s Bank of China governor, broke months of silence at the weekend with comments playing down the decline of China’s foreign exchange reserves to a more than three-year low and stressing that Beijing was not seeking to devalue its currency. This came a few weeks after state media warned George Soros against “declaring war” on the renminbi.
The war of words is likely to have real-world consequences: Chinese authorities are well aware that perception often equals reality in financial markets, as bearish sentiment becomes self-fulfilling when investors flee en masse.
