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Yuan Liquidity Dries Up In Hong Kong After Dramatic PBoC Offshore FX Intervention
One of the key things to understand about China’s attempt to mark a managed transition to a new currency regime (i.e. a devaluation completely on the PBoC’s terms) is that it comes at a dramatic cost to liquidity. Although the devaluation was widely billed as a transition towards a more market-based regime, all Beijing actually did was change what it was manipulating. As BNP pointed out last month, whereas China used to manipulate the fix to control the spot, now they simply manipulate the spot to control the fix, meaning that as long as there’s significant pressure on the yuan, the new system will require more central bank meddling, not less. This manifests itself in the selling of USD reserves and as we noted when we tallied up the three month UST liquidation total last week, these interventions had totaled nearly $50 billion in September by mid-month. Adding to the burden, the PBoC is also intervening in the offshore yuan market in order to close the spread between the onshore and offshore spots. Here’s what we said about that latest spinning plate:
Note the rationale here. This is China intervening in the hopes that said intervention will make further intervention unnecessary. That is, rampant speculation that the yuan will continue to depreciate is forcing the PBoC to intervene in the onshore market and at an extremely high cost both in terms of the country's FX reserves and in terms of the deleterious effect the reserve liquidation has on liquidity. Devaluation expectations are at least partly manifesting themselves in the offshore spot market so ultimately, the PBoC figures it will try intervening there in the hopes that narrowing the spread will mean it has to intervene less in the onshore market. Summarizing the above in four words: one more spinning plate.
Of the $50 billion SocGen suggested the PBoC had spent in September on FX interventions, some $25 billion was spent shoring up CNH. Of course these interventions are sucking liquidity out of the market and on the mainland, they’re working at cross purposes with the PBoC’s easing efforts. On Tuesday, we got what looks like evidence that ham-fisted CNH intervention is causing yuan money markets to tighten dramatically in Hong Kong. Consider the following from WSJ:
In a fresh sign of intervention offshore, the yuan abruptly strengthened to 6.34 against the dollar late Tuesday in Asia. For most of the day, the currency had been relatively calm, hovering around 6.36 to the dollar for most of the day after strengthening from roughly 6.4 per dollar last Friday.
“Chinese banks have been buying [the yuan] aggressively this evening,” said one senior trader at a major local bank.
Earlier Tuesday, the overnight rate that banks in Hong Kong charge each other to borrow the yuan jumped to 8.73% from 3.38% Friday, according to the offshore fixing rate—a benchmark based on reference rates contributed by local banks and compiled by the Treasury Markets Association, the city’s banking industry group.
Hong Kong’s markets, which constitute China’s biggest offshore yuan hub, were closed Monday and will be closed Thursday for holiday.
The liquidity squeeze has been the worst since the end of last month, when the overnight borrowing rate for offshore yuan hit as high as 20% amid a heavy selloff in dim-sum bonds—yuan-denominated securities mainly traded in Hong Kong—since investors realized yuan assets are no longer a sure bet.
Here's CNY/CNH shown over the longer term and intraday (note the spread shown in the lower pane of the two year chart):
And here's the effect on money markets:
The takeaway is that the holiday effect notwithstanding, the offshore intervention effort looks to have just shown up in HIBOR which makes us wonder how much longer it's going to be before something finally snaps here:
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Insanity on display.
Unlike the three four ham-fisted PPT interventions (so far) on display in this morning's US equities, "markets."
Keep those plates spinning, Simon!
Economics by imperial decree, Krugman is likely creaming in his jeans watching this little passion play......
Fuck that silly, brainlesss twit!
Attempting #5 as I write...
They are doing their damndest trying to keep DJIA above 16,000
BTFD.
who cares; let them eat cake.
To those still have money in this market, or buy the dips without hedging, they deserve to lose every penny when it goes down more. Seriously.
I think I get the mechanics but I don't understand the rationale. Why is the chinese government trying to strengthen the yuan? Every other country is desperate to weaken their currencies. Anyone care to 'splain?
to prevernt outflows of money - which generally favors strong currencies.
Thanks jldpc. I'm guessing what really scares them is the prospect of a major (20%+) drop like what's happening to most of the other BRICS.
Don't scare, prepare.
They wish they could prevent outflows of money…
The best they could ever actually HOPE to achieve would be to have some ability to slow it down.
Correct. But why then did they devalue in the first place? They must have known that capital outflows would follow.
Not strengthen, just trying to brake the decline caused by panicked investors trying to get out with a gain. When they signaled a lower peg, it was the shot that triggered the stampede. They are trying to keep the stampede orderly to prevent collapsing their banks. It's a consequence of a receding monetary tide created by the FED's end of QE3 last Oct.
they stole everything of value we ever created, and will soon outnumber us and leave us in the dust. they are smug and cheap, and thieves, and without morals of any kind.They see us as the target, and when we should be boycotting everything made there in retaliation - they will never change unless we make stealng from us cost something - our goof-ball president is kissing their leader's ass. The inevitable mex-america will be a dirty slum; and the Chicoms will laugh at us.
And the white folk will blame it on the Mexicans.
Yep - racism is dead. Long live the racists!
I see being politically correct works for ya. Too bad
How many MEXICAN psychopaths does it take to make a Drug Gang? Oh I forgot Mexico is a Catholic country with one of the highest mass murder rates on earth. Hmmm .. Racism??????????????
... word up homie tariffs might be a part time cure fk there products shut them down rebuild. it's kinda late. Unless Walmart, Target, & Costco chose us? Home depot & Lowes included... If someone... Warren greedy ass buffett, bill gates included, & Mark Zuckerberg!!!
Alot of names to add Tim Cook... list goes on they don't care about america
and creating job here
Project Syndicate commentary:
https://www.project-syndicate.org/commentary/chinese-economy-federal-res...
Funny how the onshore and offshore values lead to these types of holes. Holes that are taken advantage up until closed.
Greed is energy, there is no way they can react fast enough if a concerted effort is made to create these gaps.
Isn't this the reverse of the US market getting pumped by FX moves with the yen?
Personally, I expect the Chinese are jostling everything around in order to offload USTs in the confusion, and not be blamed for economically attacking the USA. That's all it is.