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China Takes "10 Steps Back," Slaps 20% Reserve Requirement On Currency Forwards

Tyler Durden's picture




 

Overnight, China decided to take steps to reduce "macro financial risks."

And by that they mean "do something quick to help ease pressure on the yuan" and by extension, on the PBoC’s rapidly depleting FX reserves.

To that end, starting October 15 banks will have to hold the equivalent of 20% of clients' FX forward positions with the PBoC, where the money will sit, frozen, for a year, at 0% interest.

Obviously, that will drive up the cost of taking speculative positions which the PBoC hopes will help narrow the gap between onshore and offshore yuan and bring down volatility, although the degree to which this will help fill the CNY-CNH spread looks like an open question.

"It’s a move to ease the reduction in foreign-exchange reserves," Tommy Ong, managing director for treasury and markets at DBS Bank Hong Kong, tells Bloomberg. "It will also remove lots of speculative trades that aim at short-term gains as the reserves have a minimum lock-up period of one year," adds Stan Chart’s Becky Liu. 

Here’s a bit of color from FX strategy desks via Bloomberg:

  • Andy Ji, Singapore-based currency strategist at CBA:
    • This is typical FX control, as it limits the FX forward positions
    • PBOC has intervened before in the forward market, but imposing the 20% limit on outstanding forward position will require less intervention effort
    • Spread on CNY and CNH may not substantially narrow on this move alone, as global demand on dollar remains high and China economic grow remains slow
  • Fiona Lim, Singapore-based senior FX analyst at Maybank:
    • This seems to be another move to discourage yuan forward selling and to lower yuan depreciation expectations
    • Offshore-onshore yuan gap has been pretty persistent because of yuan depreciation expectations and officials want to narrow the gap
    • Gap will be sustained as the economy continues to remain under pressure
  • Becky Liu, senior Asia Rates strategist at Standard Chartered:
    • Move aims to curb speculative onshore positions, anchor onshore forwards and hopefully eventually also bring down offshore forwards
    • This move itself would reduce the need for PBOC to intervene in the onshore market
    • Don’t think it will ease reduction in FX reserves; it basically is just making it a lot more costly to long USD in the onshore market

To the extent that the new currency regime ushered in on August 11 represented a "market-oriented" reform - and that characterization, as evidenced by daily FX interventions, is at best questionable - this move "is 10 steps back," one Hong Kong trader told Reuters, a suggestion that this isn't something the IMF will look favorably on when evaluating the yuan's SDR bid.

In any event, the bottom line is that this requirement will cost banks money, which means the cost of trading for clients will rise and that, China hopes, will translate into less pressure on the yuan and will thus help to curb the FX reserve burn. As we've seen with Chinese equity markets, the more draconian the measures the more likely it is that Beijing feels like it's losing control. As Credit Agricole puts it "while the introduction of reserve requirements for CNY forward trading overnight may help ease the selling pressure on the currency, the measure also reflects the fact that the markets did not really respond to the recent official attempts to prop up the CNY verbally." In the end, this doesn't alter any of the dynamics that are causing the depreciation pressure. Rather, it just punishes anyone looking to capitalize off those dynamics. Which we suppose is consistent with Beijing's general approach to dealing with problems.

 

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Tue, 09/01/2015 - 07:47 | 6494394 Cognitive Dissonance
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"All your money are belong to us." - Rothschild

Tue, 09/01/2015 - 07:58 | 6494421 Jtrillian
Jtrillian's picture

The race to the bottom has begun.  China has a strong manufacturing sector.  They can bounce back.  What does the US do besides having the bankster capital of the world?  China has been buying physical gold at breakneck pace.  The US will not even allow it's own government to audit it's gold holdings.  The only thing keeping the  US going has been it's status as the worlds reserve currency and the dollars fate was sealed the moment Nixon took the US off the gold standard.  It was at that moment it became worthless paper backed by nothing.  In the last decade, we have seen the dollar losing reserve status rapidly with BRICS banks, Chinese exchanges opening, countries moving off SWIFT, and other countries moving towards precious metals for currency. 

You get three guesses who will recover from this next financial collapse?  The first two don't count.  It's better to be prepared for a catastrophe such as this before it happens rather than scramble after the fact.  You have been warned.

Tue, 09/01/2015 - 07:59 | 6494432 Seasmoke
Seasmoke's picture

Guess 1. USA.
Guess 2. Puerto Rico.
Guess 3. China.

Tue, 09/01/2015 - 08:40 | 6494533 Groundhog Day
Groundhog Day's picture

Game of thrones....Bitchez

Tue, 09/01/2015 - 08:55 | 6494583 MalteseFalcon
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China takes 10 steps backward in the opinion of an FX trader.

Next China will be accused of taking three "umbrella twirls".

Tue, 09/01/2015 - 09:36 | 6494796 realmoney2015
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I believe China is getting ready to have the reserve currency. They have essentially depegged from the dollar, they have been buying tons (record amounts) of gold, and now the are tightening up their reserve requirements. All of these things could be used to unleash a 'new currency' after the current dollar system crashes.

Tue, 09/01/2015 - 08:04 | 6494443 Took Red Pill
Took Red Pill's picture

"What does the US do besides having the bankster capital of the world? "

Make war!

Tue, 09/01/2015 - 09:14 | 6494679 Apocalicious
Apocalicious's picture

Moar War! 

Tue, 09/01/2015 - 08:46 | 6494547 kappal_toba_dhu...
kappal_toba_dhurr_ne_thook's picture

China's manufacturing sector is stronger than USA, but still a lot is fake and copycat.  They have 200 million unemployed, with more on the way with no more ghost mega cities to be built. They have runaway military expenses, few friends as they have antagonized nearly all their neighbors, etc. In short, CHINA IS FUCKED. I predict the CCP will lose power and the country will split up into 5 nations.  Wait and see. This is what will happen.

Tue, 09/01/2015 - 10:19 | 6494949 MarkGoldman
MarkGoldman's picture

I've heard it whispered that China was allowed to build itself up for the very reason of having it implode from within. 

How else can you deal with 1.3 billion folks without getting ones hands dirty?

Tue, 09/01/2015 - 08:46 | 6494552 techstrategy
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I really like this website, but am amazed at how blinded everyone is. The world is de-financializing. And OUR PEOPLE and OUR NATION will thrive as it happens. The world is breaking through the "TBTJ" fractional reserve banking control fraud where phantom claims created from nothing have been used to take control of REAL assets and the blood, sweat and tears of the people for the past century if not longer. FRN, UST and GOLD are SENIOR to their phantom debt claims. De-financialize each and every day and gradually redeploy into investments in OUR PEOPLE and OUR NATION'S productive capacity and self sufficiency, the only SUSTAINABLE sources of global economic and military leadership and a stable and prosperous future for your children and theirs. 

They are hyperlevered against fundamentals.  Simply convert those financial assets dependent upon nearly infinite abuse of the PRIVATELY created and controlled money supply to physical cash, ST UST and gold each and every day.  The endgame is mathematically certain...

Tue, 09/01/2015 - 09:16 | 6494692 astoriajoe
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Have you posted your spreadsheet somewhere?

Tue, 09/01/2015 - 09:24 | 6494709 Jtrillian
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You do realize that if everyone "de-financialized" that this would crash the stock market?  Given that the US stock market is one of the primary producers of GDP, that would be devastating for the US economy. 

This is what happens when we get away from creating real value (building stuff, inventing suff, etc).  We have been gaming the global economy by abusing our status as a reserve currency.  Now the world is beginning to say, "we don't want your dollars".  They are converting into hard assets. 

This is what happens when you belive statements like "deficits don't matter".  When we baloon our debt to more than 18 trillion under two presidents (the latest of which is the WORST OFFENDER). 

The economy would have crashed without QE.   The only reason we didn't is because of QE.  Now we are addicted to QE.  And the devaluation will continue until people lose faith and hyperinflation takes hold via s stagflation economy. 

This is where the probability lies IMHO.

Tue, 09/01/2015 - 08:55 | 6494586 MSimon
MSimon's picture

The US has the 2nd largest manufactuing sector in the world. You guys are so easily fooled by propaganda.

Tue, 09/01/2015 - 09:14 | 6494682 Jtrillian
Jtrillian's picture

Really?  Where do you get your information?  Before you accuse people of being fooled by propaganda, perhaps it is wise to take a look in the mirror first. 

 

http://www.wisegeek.org/what-are-the-top-manufacturing-countries.htm#did...

Tue, 09/01/2015 - 09:26 | 6494740 post turtle saver
post turtle saver's picture

wait until you see what the rankings are after the yuan completes its revaluation... fun fact, the rankings are measured in USD and the majority of China's catching up in the mfg ranking was a 25% appreciation in yuan value from 2003 to around 2013...

well, now all that bullshit is going to unwind and you're going to find out damn quick who the real mfg powerhouse in the world is... guess what, it ain't China...

Thu, 09/03/2015 - 08:43 | 6503724 Max Steel
Max Steel's picture

you're one hell of an idiot turtle cunt . rankings are measured in dollar is of no significance here

Tue, 09/01/2015 - 09:18 | 6494696 post turtle saver
post turtle saver's picture

I can always tell who the raving dumbasses are on this board... they're the ones that say the following:

- the US has no manufacturing capacity and is just a bunch of financial paper pushers

- the US doesn't audit its gold holdings and make those figures available to the public

seriously folks... when you do that you make picking the fools froms the sages in this sea of doom porn a hell of a lot easier...

Tue, 09/01/2015 - 09:23 | 6494726 Jtrillian
Jtrillian's picture

When a person has no facts to support their claims, they resort to personal attacks.  It's all they have after all.

Tue, 09/01/2015 - 09:30 | 6494764 post turtle saver
post turtle saver's picture

I've already posted the US Treasury reports on public audit for US gold holdings multiple times... fact

You can peruse just about any recent set of stats on US vs. China being #1 or #2 mfg countries, and the consensus usually is a) much of the change in ranking hinges on currency appreciation / depreciation, and b) no one and I mean NO ONE spends money on high end mfg R&D like the USA... China makes trinkets, the US makes the future, it's plain as the nose on your face... fact

nice try in twisting the discussion into accusing me of ad hominem attacks, but your pathetic attempts at framing the discussion will find no purchase here...

Tue, 09/01/2015 - 09:58 | 6494851 Jtrillian
Jtrillian's picture

The last time I checked, the US made flashlights. 

You speak as though the future is developed here.  I can only assume you are a military contractor.  That is the only part of the US manufacturing sector that is still stateside (in part).  They do spend a lot of money on defense contracting.  They waste it actually.  Even worse the military complex actually dictates to the pentagon what they need (even when the Pentagon doesn't need it).  Keep in mind that all government spending is not real growth.  That adds to the national debt every year.  If anything the defense industry creates debt.  That which ideally generates a PROFIT is real growth.  When you create debt in order to make a profit, that is not REAL profit.  That is playing with the math. 

Everything else has been shipped overseas because of one simple fact.  It's cheaper.

The future is developed overseas.  That smart phone in your hand, your car, your tv, all of the technoldy is made overseas.  Those are hardly trinkets. 

You believe everything your government tells you?  You don't find it odd that they refuse an audit?  Have you done the math on the actual holdings vs the amount of paper that is out there?  There is no way the US has what it says it has.  And there is no proof other than a treasury report.  How can you dismiss the delays and refusals for countries to demand delivery of their holdings? 

In the end, actions speak louder than words and the US treasury does not practice "The Art of War" like the Chinese do.  If anything, they act strong when they are weak.

Only time will reveal the truth.  But I choose to stick to the side of probability and you can stick to the attacks.  I already know which one will prove out in the end.

Thu, 09/03/2015 - 08:46 | 6503742 Max Steel
Max Steel's picture

oh really ? i have never seen you sharing it on zh ever. Give us the proof cunt . Keep your BS with you deluded moron. When you know nothing better shut up. You are suffering from murika exceptionalsim . Facts are not your friends sook.

Tue, 09/01/2015 - 11:07 | 6495131 Smiddywesson
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Not to criticize, but if facts were all there was to this, investing and trading would be easy.  Not only are some facts more important than others, some are more accessible than others, so I think the propaganda charges have a lot of merit. 

 

More importantly, you are using today's facts and projecting them out into the future.  History doesn't work like that, it cycles, and linear projections by experts based on today's facts invariably are proven to be wrong.

 

Think about how the Japanese were projected to take over the world a few decades ago, and how that prediction matches your own about China.  The games changes, and we don't know shit about what the future holds, all we can do is have the humility to acknowledge that reality and not criticize others because they don't agree with your facts.

 

Human nature and corruption gobbled down the most powerful empire and culture in the history of the world in less than four decades.  My gut tells me your facts are wrong, and human nature and corruption will gobble down the Chinese in less than two decades.  You cannot escape history.

Tue, 09/01/2015 - 09:44 | 6494829 Dawgeatdog
Dawgeatdog's picture

The race to the bottom started years ago. 

Tue, 09/01/2015 - 09:47 | 6494841 skeelos
skeelos's picture

"It was at that moment it became worthless paper backed by nothing."

It was and is backed by the strongest single military in the world, and the US hasn't completely abandoned all manufacturing, the US still cranks out top shelf weapons.  Nixon left the gold standard just as the Vietnam war was winding down, and people seem to think it was just a coincidence.

A nation cannot be a net exportor of both money and goods, and if you decide to export money then War=Profits, so you destabilze as many places on the planet as possible.  If money had to backed by gold instead of bullets, you couldn't hold enough gold to print all the money you wanted to export.

Tue, 09/01/2015 - 10:41 | 6495026 Smiddywesson
Smiddywesson's picture

1.357 BILLION mouths to feed

Insufficient energy reserves

Insufficient fresh water

Insufficient farmland

Out of control environmental disaster

A balkanized people representing every religion in the world, and who speak almost 300 different languages, held together at the point of a bayonnet and the empty promise of The Century of China.

A population bereft of women because they aborted them during the One Child Program.

Translation:  An angry populace that was fed a bunch of baloney that is only now learning their country is screwed up, their retirement funds are gone, and their kids can't get laid or find a job.

 

Rampant corruption, and this is the big one, because corruption is the enabler which ensures problems never get fixed and everything spirals towards collapse.

Brother, you drank the Koolaid.  You actually think anything coming out of China has any factual basis at all.  You know what China has, a handful of beneficial trade agreements that can change at the drop of a hat, scores of countries that can undercut their prices, and an inevitable collapse on the horizon.  They will be lucky if THERE EVEN IS A CHINA IN THE FUTURE.  I give it 20 years, tops.

Thu, 09/03/2015 - 08:48 | 6503751 Max Steel
Max Steel's picture

Clearly you've never been to China perhaps. Your muritards are born idiots perhaps  i don't know why your media spends so much to make you idiot koolaiders think in their fashion 

Tue, 09/01/2015 - 07:55 | 6494423 klayton biggs bee
klayton biggs bee's picture

Quick! Que the Chinese pilot joke names!!!

Tue, 09/01/2015 - 07:47 | 6494398 Takeaction2
Takeaction2's picture

Keep an eye on this shit...may sound batshit crazy what these other countries do until it happens to us.....I feel something is coming.

Tue, 09/01/2015 - 07:55 | 6494422 knukles
knukles's picture

Progress led by confusion boats, mutiny from stern to bow
Be careful people.  It's a clusterfuck out there.

Tue, 09/01/2015 - 07:46 | 6494399 Winston Churchill
Winston Churchill's picture

Fluck the SDR.

Sino Russo alliance is making their move.

Tue, 09/01/2015 - 08:14 | 6494466 westminster
westminster's picture

SocalistDemocraticRepublic

Tue, 09/01/2015 - 09:00 | 6494617 Urban Redneck
Urban Redneck's picture

If they are... it would explain the divergence between the mechanics of their actions, and the convenient narrative about their motivations (even here at ZH).  

Tue, 09/01/2015 - 07:47 | 6494400 eddiebe
eddiebe's picture

20% seems very prudent to me, but even that is after all just fiat.

Tue, 09/01/2015 - 07:50 | 6494405 Tinky
Tinky's picture

We are now – quite obviously – in the stage of the collapse in which Central Banks react with increasing desperation in their (ultimately) futile efforts to keep the balls in the air.

Increased volatility? Who'd a thunk?

Tue, 09/01/2015 - 07:50 | 6494409 Chuck Knoblauch
Chuck Knoblauch's picture

They are increasing the value of USD$.

This is how China blows things up.

Tue, 09/01/2015 - 07:52 | 6494416 Winston Churchill
Winston Churchill's picture

Yep, this has all been gamed out and is quite deliberate.

Tue, 09/01/2015 - 08:14 | 6494469 ThroxxOfVron
ThroxxOfVron's picture

No one is going to lock up 20% for a year at zero with the currency risk embedded unless they KNOW that there is way more than 20% upside.

So this is either a dead trade or purely an insider's trade?

..Or, is the implication that China is indeed planning a serious re/de-valuation, of more than 20%, within the one year time frame and wants to lock in the banking sector and party insiders to protect the existing 'monied' hierarchy?

While not necessarily a form of capital controls or a tariff this seems to imply further protectionist measures are forthcoming.

Rehpothecation and swapping of securities, insurance and derivatives contracts, commodities stocks ( lol ) , bills of trade, and other forms of back-door movment of liquidity via secondary markets are still available and will be utilized to avoid the direct currency control and leveraged trade suppression regimes.

I don't see why banks can't end run this by transforming onshore currency via finacialization.

Buy a security or forward in a non-curency onshore and swap or rehypothecate or sell offshore.

-Just like MF Global moved assets between the US and The City of London, or AIG channed liablities from London to Europe, etc...

Tue, 09/01/2015 - 08:18 | 6494483 gatorengineer
gatorengineer's picture

How china blows things up?  You are smoking some good shit my friend.  China is beling more effectively destroyed than being nuked.  Whats being done to them is the fiscal equivalent of a neutron bomb.

China is on the recieving end of the fucking here.  Not doing it.

The Petro Yuan is being destroyed, before it existed.

 

Tue, 09/01/2015 - 08:51 | 6494567 Chuck Knoblauch
Chuck Knoblauch's picture

Put your money where your mouth is.

Tue, 09/01/2015 - 08:59 | 6494609 Ms No
Ms No's picture

They're fighting back and apparently the US isn't super happy about it or things wouldn't be blowing up in China.  Schiff may have called this too they are starting to lose control.  The meltdown was always coming and likely China decided not to allow the bastards to choose the timing of it, can't blame them.

Tue, 09/01/2015 - 07:51 | 6494410 ToSoft4Truth
ToSoft4Truth's picture

What's next 20% down on cars – F is currently offering 0% interest on 72-month car notes.  3% to get a house, right?  Jack that to 20%…..

Tue, 09/01/2015 - 08:24 | 6494496 T-888
T-888's picture

....P O P!

Tue, 09/01/2015 - 07:51 | 6494411 buzzsaw99
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won't somebody think of the poor banks and speculators?? /s

Tue, 09/01/2015 - 07:54 | 6494420 falak pema
falak pema's picture

Chinese financial conundrum does not add to the financial stability of BRICS nor the US asset ramp up.

Where have all the flowers gone? No growth!

Tue, 09/01/2015 - 07:57 | 6494428 Seasmoke
Seasmoke's picture

The Fed sure is stuck in a Chinese cube now.

Tue, 09/01/2015 - 07:57 | 6494430 Omega_Man
Omega_Man's picture

China will get rid of use of  US dollars ... they are just made out of thin air to distort markets anyway and enable evil .

Tue, 09/01/2015 - 07:59 | 6494433 FranSix
FranSix's picture

Capital controls, right?

Tue, 09/01/2015 - 08:02 | 6494440 Catullus
Catullus's picture

It also makes for a disorderly liquididation of yuan. You can't forward hedge in order to convert to dollars without holding 20% in a bankrupt bank.  Now you're forced into the spot market liquidation.

Tue, 09/01/2015 - 08:06 | 6494446 Argenta
Argenta's picture

Something big is about to happen.  I think China is looking for a reason to quickly offload it's large holding of US debt.  Watch for really, really large gold purchases by unknown entities...but *we* know it'll really be Belgium.

-Argenta

Tue, 09/01/2015 - 08:09 | 6494448 Element
Element's picture

How can any intelligent investor put money into a (falling) casino market where you wake up in the morning and it's all, "I am altering the deal, prey I don't alter it any further"?

 

Tue, 09/01/2015 - 08:09 | 6494450 Redneck Hippy
Redneck Hippy's picture

This move seems like the equivalent of capital controls. It has to backfire. People will stop trading onshore yuan while offshore yuan gets increasing devalued relative to the mainland.

Central planners are clearly flailing.

Tue, 09/01/2015 - 08:15 | 6494473 Winston Churchill
Winston Churchill's picture

Or its quite deliberate, and they have been creating cover.

Too many co-incidences with the timing on this.

We will see.Somebody in the oil market knew about Syria and Russian troops.

China dumping USTs, forcing up the dollar to cause an implosion.I could go on, but

I see a pattern here, can't you ?

It just looks chaotic on the surface.

Tue, 09/01/2015 - 08:09 | 6494451 SillySalesmanQu...
SillySalesmanQuestion's picture

He who stay liquid last, have last laugh!

Tue, 09/01/2015 - 08:30 | 6494502 BurningBetty
BurningBetty's picture

How is this suppose to help? First thing you learn in finance is present and future value of money. Sure enough, if rates get negative, keeping money with 0% interest actually preserves the value. We all know China is not at 0% so who would even consider leaving their money in a lockdown for a YEAR! when that cash can be used somewhere else. This reminds me of France and Hollande putting CEOs into house arrest for even thinking of moving business abroad, even though the companies were not profitable and had to cut costs. What a world we live in. Actually, wait a minute. I am not really sure there will be one once this is over.

Tue, 09/01/2015 - 09:24 | 6494731 laomei
laomei's picture

from the outside it looks like china is doing something smart, but in reality it's all reactionary and the country is being run by fucking morons.  most countries are run by fucking morons, so that's not exceptional.  china has a long history of fucking itself over time and time again.  just wait for it and pay attention, it will be hilarious when it all falls apart.  rest of the world is gonna hit some nasty depression, china will see some civil war probably as well.  china is not global leadership material and never will be because once there is a prize to be had chinese fight amongst themselves over it and ruin it.

Tue, 09/01/2015 - 09:39 | 6494809 Dawgeatdog
Dawgeatdog's picture

Yeah, I can just see China allowing for a free trading currency. It will be every bit as free as is the press. 

Tue, 09/01/2015 - 10:19 | 6494939 SMC
SMC's picture

10 Steps Back?  That is incredibly smart considering the rate risk is increasing throughout the world.

Tue, 09/01/2015 - 10:18 | 6494943 Angry Plant
Angry Plant's picture

China went around the world recently promoting Yuan based trade. Now it finds itself in situation where everyone outside of China that took yuan as payment is now trying to convert those yaun into dollars.

So there stuck ether they convert all those foreign held yuan to dollars bleeding there reserves. Or they can watch yuan value fall as holders sale yuan at a discount outside of China.

Then they make some stupid banking reg that does absolutely nothing to do with the issue that is causing the problem.

Falling value of yuan is the natrual outcome of china promoting yuan based trade coupled with massive amounts of internal chinese QE.

Tue, 09/01/2015 - 12:22 | 6495576 Secret Weapon
Secret Weapon's picture

If we are still a manufacturing powerhouse how come we are not an employment powerhouse?

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