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.

Mr Bass’s letter found a receptive audience because it played into two popular themes: alarm at capital flight and scepticism over Chinese statistics, which many people presume to be fabricated.

There is just one problem: one of Mr Bass’s key claims about China’s foreign exchange reserves data — and thus the central bank’s ability to defend the exchange rate against further depreciation — does not hold up to scrutiny.

At $3.2tn, China’s stated forex reserves remain the world’s largest. Economists broadly agree China requires about $2tn to meet the International Monetary Fund’s standard for reserve adequacy, based on what a country needs to pay for imports and meet foreign debt obligations.

But Mr Bass says China’s true reserves are more than $1tn below the headline total once necessary “adjustments” to official data are made. With less forex ammunition on hand than widely believed, the argument goes, the People’s Bank of China will be forced to scale back its defence of the currency.

Hayman has wagered billions that the renminbi and other Asian currencies will depreciate, joining hedge funds such as David Einhorn’s Greenlight Capital and London-based Omni Partners.

The biggest “adjustment” Mr Bass makes is $700bn in reserves he says is tied up in the sovereign wealth fund, China Investment Corp. Launched in 2007, CIC’s mission was to raise returns on China’s foreign wealth, which was invested in US Treasuries and other low-yielding assets. By definition these assets are less liquid and not intended to be deployed in currency markets.

However, China economists say CIC’s assets are not included in the main forex reserves data that investors watch closely. When CIC was set up in 2007, China’s Ministry of Finance issued special bonds to the PBoC in exchange for a tranche of $200bn in foreign-exchange assets. The bonds filled the hole in the PBoC’s balance sheet that would have resulted from a simple transfer of assets. As domestic renminbi bonds, they are not classified among China’s forex reserves.

“This is pretty clear based on public disclosure and information,” said Tao Wang, China economist at UBS — although she acknowledged that “nothing is 100 per cent”.

Eswar Prasad, former head of the IMF’s China division, agrees that CIC assets are not counted.

“If FX reserves were being used directly [in CIC], it’s not clear why MoF would have to issue bonds,” he said.

Classifying CIC assets as official reserves would also amount to a clear violation of IMF rules, which China agreed last year, for how reserves must be defined and reported. The IMF says only funds that are “readily available to the monetary authorities” may be counted as reserves. As a subsidiary of the finance ministry, CIC fails that test.

“If the assets are not on the PBoC’s balance sheet, then in principle FX holdings cannot be counted as part of reserves,” said Mr Prasad.

Jianguang Shen, chief economist at Mizuho Securities Asia, says he has verified with the State Administration of Foreign Exchange, a unit of China’s central bank, that CIC assets are not included in their reserves. Safe did not respond to request for comment.

“I think [Mr Bass’s] report is mistaken,” said Mr Shen, who previously worked at the IMF and European Central Bank.

Mr Shen also notes that in 2007, Safe was happy to relinquish forex assets, as “twin surpluses” on both the current and financial accounts were flooding the central bank with more foreign assets than they could effectively manage. The US and Europe were also criticising China for fuelling global financial imbalances.

“At that time, Chinese authorities were actually embarrassed that reserves were rising all the time. They took a lot of blame for having too much reserves,” said Mr Shen.

Transfers of forex wealth from the PBoC to CIC after 2007 were not publicly disclosed but were probably handled similarly and in any case never matched the size of the initial tranche. Ms Wang estimates them at less than $100bn.

Mr Bass does not explain his $700bn figure but he may be extrapolating large undisclosed transfers based on the rapid growth of CIC’s total assets. Yet Ms Wang notes that such an estimate probably fails to account for the large capital appreciation of CIC’s portfolio, notably from its shares in state-owned banks, which have seen their market capitalisation grow enormously since 2007.

Hayman Capital did not respond to a request for comment.

“The idea that the People’s Bank (of China) is running out of FX reserves doesn’t stand up to scrutiny,” Mark Williams, China economist at Capital Economics, wrote in a note on Monday. “But the fact that many take it seriously is a sign of how far sentiment has swung against China.”