(Yicai Global) Oct. 29 -- China's central bank has voiced a veiled warning for those who wish to short sell the Chinese yuan as the currency keeps on facing depreciation pressures.

The offshore yuan touched 6.97 against the US dollar on Oct. 26. The onshore rate briefly slid to USD6.96. "We directly engaged with those forces trying to short the yuan years ago, which remains fresh in our memory," said Pan Shenggong, deputy governor of the People's Bank of China, on the same day. Short selling refers to borrowing assets in the hope of their value going down so as to make a profit of the difference once returning the asset back to the original owner.

Today the offshore rate had recovered slightly to 6.9556 against US dollar, according to Bloomberg at 2.33p.m. The onshore yuan traded a dash stronger at 6.9527 versus US dollar at 2 p.m.

The devaluation arises partly from the market supply and demand. The temptation to short sell has risen since the redback's depreciation since June, but most institutions began to close their positions at around 6.75, according to Yicai Global's interviews with offshore banks and related institutions.

There were four or five times more "big shorts" in 2015 and 2016 than now, said Luo Yi, a head of forex trading in a foreign-funded overseas bank who did not want to tell his real name. Those were all crushed by China's central bank, Luo added. 

 "Hedge funds who shorted the yuan suffered a setback in 2016 and 2017 and now dare not to short the big position at around 6.9," Luo said. 

"It is not easy to take a short or long position in the yuan," added Zhou Hao, Commerzbank AG's senior economic analyst in Asia.

China's central bank has been in favor of more currency flexibility and less intervention. Many market analysts have tried to calm traders about the fluctuations that have catapulted the redback close to the psychological border of 7 versus US dollar.

"The drawbacks of the yuan depreciation may be greater than the imaginable benefits," said Sheng Songcheng, a counselor of the Shanghai Municipal Government. The direction cannot be perpetual for either the yuan nor the US dollar. Changes in the greenback and euro are variables worth looking into, he added. 

Editor: Emmi Laine