Death to Speculators! (RMB Deluxe Edition)

During the Asian financial crisis, then-Malaysian PM Mahathir Mohamed singled out speculators for blame. Although he didn't specifically say "death to speculators," he became associated with the catchphrase. Speaking of which, it is enjoying something of a revival. You see, Chinese monetary authorities are wary that its currency is becoming a one-way (appreciating) bet for currency speculators as China gradually strengthens then yuan and reduce its (perceived) undervaluation. In either case, speculators are persona non grata.

Over the past few weeks, Chinese authorities have thus thrown speculators a curveball in American-speak by appreciating its currency sharply by the standards of its post-2005 transition to a managed float from a strict peg, culminating with recent moves that took many by surprise:

A two-week slide in China's yuan accelerated Friday, with the currency taking its biggest tumble since a 2005 revaluation on speculation the central bank is stepping up efforts to push it lower. A 0.9% drop against the U.S. dollar Friday brought the week's losses to 1.2%, more than twice the 0.5% loss that spooked the market last week, coming as it did after years of steady gains. The yuan is down 1.8% so far in 2014, wiping out more than half its 2.9% gain last year. The slide has been engineered by Beijing to thwart short-term speculators who are betting on a continued rise and to introduce greater two-way volatility into the trading.

Still, the especially large move Friday took the market by surprise, as the central bank had set a slightly stronger morning reference rate for the currency, and it was flat in early trading. But later in the morning the slide accelerated, with traders saying the central bank was intervening in foreign-exchange markets through state-owned banks—buying up the U.S. dollar and selling the yuan.

Take that, specs! Chinese authorities are especially wary of hot money inflows riding on expectations of currency appreciation. It may even be aimed at shaking off speculators as China widens the daily trading band for its currency further as soon as next week:

The long, steady appreciation has drawn so-called hot money looking to profit from the gains; that has pumped cash into the economy and complicated the People's Bank of China's effort to curb credit growth. Concerns have been growing about bad debt and the state of the "shadow-banking" system, an assortment of trust companies, insurers, leasing firms and other informal lenders. The PBOC's moves to restrain the yuan come just before the start next week of the National People's Congress meeting, which could produce further liberalization of China's currency regime.

Ultimately, though, you can expect the yuan to revalue in the medium- to long-term. It's just that Chinese authorities wish to limit speculative inflows promoting what they believe is unwelcome monetary expansion built on leveraged bets. So it's a stronger yuan combined with, er, death to speculators!

UPDATE: Bloomberg has more on the expected widening of the trading bank to ±2% daily from its current ±1% by midyear:

The People’s Bank of China is expected to double the yuan’s trading band by the end of June, according to the majority of 29 analysts surveyed by Bloomberg, as policy makers loosen exchange-rate controls and promote greater usage of the currency in global trade and finance. Lawmakers will meet next week to decide on major economic policies and an official report tomorrow is forecast to show manufacturing expanded this month at the slowest pace since June.