China Stocks, Credit Risk Worsen Despite "Short-Squeezed" Yuan Strength
On the heels of new reserve ratio regulations and the biggest strengthening in the Yuan fix in 4 weeks, offshore Yuan has strengthened notably (despite Chinese default/devaluation risk surging in the CDS markets). Chinese stocks are weaker in the early going but corporate bond yields continue to slide to new record lows as the "last bubble standing" stands ignorant of the risks around it.
PBOC rixed the Yuan 0.07% stronger - the biggest gain in 4 weeks...
- *PBOC STRENGTHENS YUAN FIXING BY 0.07%, MOST SINCE DEC. 21
Offshore Yuan is rallying in early trading, because as Bloomberg notes,
*PBOC TO IMPOSE RESERVE RATIO ON OFFSHORE BANK YUAN ACCOUNTS
*PBOC SAYS RULE DOESN'T APPLY TO FOREIGN CENTRAL BANKS
*PBOC SAYS RULE WON'T AFFECT DOMESTIC YUAN LIQUIDITY
*PBOC SAYS WILL USE MONETARY TOOLS TO MAINTAIN LIQUIDITY
PBOC will impose a required reserve ratio on offshore participant banks with yuan deposits in the mainland, according to people familiar with the matter.
Raising reserve requirement is meant to increase cost of funding and discourage speculative short yuan trades, says Fiona Lim, Singapore-based senior FX analyst at Maybank
This marks the PBOC's latest attempt to make shorting the CNH prohibitively costly by forcing banks to purchase CNH in the open markets. As Reuters adds, by forcing banks offshore to hold more yuan in reserve, it would reduce the amount of the currency available in the market, squeezing supply further and making it more difficult and expensive for speculators.
The costs of borrowing yuan "are set to rise" as a large volume of offshore yuan is actually being deposited back into China, explained an international investment banker who declined to be identified.
"The expectation of yuan devaluation has led to massive remittance of yuan," said China Industrial Bank's chief economist Lu Zhengwei.
"Raising the RRR will increase the cost of arbitrage," Lu said."Domestic banks conducting exchanges offshore and remitting yuan to China will be further controlled, pushing up the cost of offshore yuan funding."
As a result of this latest intervention, the Onshore-offshore Yuan spread once converged again:
Although it does pose the question how desperate China must be, and how massive the capital outflow, if the PBOC is engaging in new FX manipulations virtually on a daily basis to prevent the ongoing uncontrolled devaluation of its currency.
Perhaps related to that, Chinese sovereign default/devaluation risk surges.
And stocks weaken:
- *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 1.6% TO 3,068.23
- *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 1.8% TO 2,847.54
But the money continues to flow aimlessly into the "last bubble standing" as we detailed previously with record low corporate bond yields in China (despite a collapse in creditworthiness fundamentals and huge supply).
But analysts are starting to worry:
“2016 is a year when we will see systemic risks emerge in China’s credit market,” said Ji Weijie, credit analyst in Beijing at China Securities Co., the top arranger of bond offerings from state-owned and listed firms.
"There may be a chain reaction as more companies are likely to fail in a slowing economy and related firms could go down too."
Charts: Bloomberg
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Can someone explain what China is trying to do? This see-sawing back and forth between devaulation and strengthening makes no sense to me.
Sum Ting Wong, Bitchez!
As the stock markets crash the Yuan goes down. They don't want it to go down too fast so they enter the Forex market and sell treasuries and buy Yuan. That seems to be what some of the comotion is all about.
I'm just a hobbiest though so maybe a pro will step in with a better explanation.
I'm also a hobbyist and I agree with the above hobbiest
The Politburo meets on M-W-F.
The People's Defense Council meets on T-TH.
The "Get me the fuck out of here" Committee meetings have been cancelled due to a lack of a quorum.
Seriously, my guess is that they are frantically managing today's crisis by whatever means necessary regardless of whether that stirs up a different crisis for tomorrow. Strictly day-to-day while hoping that something turns up to bail their ass out before hitting Niagara Falls.
The Chicom's are trying to crush those who are "playing" their currency. They are also trying to prop up their economy by any means necessary to avoid their heads being put on pikes bt the "citizens" if their economy goes sour.
At this point it is fruitless. In accepting the financial engineering and credit games of the West, they have become what they despised, and the fractional reserve banking scheme will collect their heads as tribute.
Yep.
They thought they were smarter than a group of people who are generationally trained economic assassins.
They might indeed be smarter but they aint more "savy".
Game, set, match.
They're caught in the same neo-Keynesian vice every other central bank is, strong(er) currency=lower stawk prices.
Sooo...the "worker" says, wait a minute you just devalued my labor from only yesterday! The state & crony-owners say...well...yeah...but at least you will have a job tommorow, so be thankful we didn't take it all.
So fucking FORWARD! into the Keynesian abyss, enjoy your ride into serfdom hell and don't forget to pay the ferry man!
In BitCoin, to get the last laugh ;-)
Despite their 'capital controls' of allowing only $50,000 in usd out of the country, Chinese money converted into USD is [somehow] flooding out of China into $6-$8 million houses in Seattle the news says. if course, no one in the real estate biz or banking ever asks, 'Where dat $8 million cash come from?"
I guess if you're a gubmint official or a Chinese V.I.P. the cap controls don't effect you. Sort of like the usa where the rules don't apply to gubmint peeples, only to the sheeples.
China pegs to a basket not just the dollar. Dollar contributor to the basket was down, hence the peg strengthens. This is just trim. Real moves are step changes.
Think margin calls.
Sell your US Treasuries BITCHEZ!
Mr. Xi, you have been fucking warned.
I would go a little further than that and advise people to sell all their paper assets everywhere.
When a crash occurs, you will have to start over with what's in your pocketses.
The PPT is already in motion. The BoJ is running pretty short on JGB monetization, and they own huge positions in Gold/metals and foreign equity markets.{ they won't unload local equities}
I have 4-5 packs of popcorn, so I'll just sit back and watch.
Gold gets back down to the $1070.00 area I'm backing the truck up.
Yen at some point they have to take paper gold out. I don't think physical will follow but paper gonna get hammered one day.
Physical gold will be fine. The risk premium will only increase. Silver actually looks better right now.
These traders/speculators are going to have to cover their paper hedges, in order to fulfill other collateral loan obligations.
If you have perfect credit and walk into a bank with Google or Microsoft stock certificates, the bank is going to lend you, at maximum 50-55 cents on the $usd. That was 2 years ago.
That's the point the Tylers are trying to reiterate. Credit and Bubbles are even bigger now. Companies have run out of writedowns, and layoffs.
Revenue is shitty and they can't hide it anymore.
Yen, you always make a lot of sense, I enjoy and value yur insights, thanks
Seems there is a risk of a mistake being made as the complications grow. There may be a widening ripple of blowback. Each decision to respond causes biggerr consequences. Eventually no response is any use. Wonder what happens when Chinese importers are. Asked to pay cash and they don't have it. Sometime ttbefe will be scarcity of goods going to China then scarcity of currency then printing then US corporates lose suppliers. When we make cars sources in China are critical. Grinding to a halt would be beyond catastrophic. Once it shuts down here. In US it will be a very difficult situation . The big companies can't afford to restart production of components . Huge unemployment huge social costs. Lack of money to consume means spiraling defaults. Back to the Barter system
I don´t understand why the Chinese are trying to prop up the exchange rate of the Yuan. They got little foreign debt.
This is almost like when they killed birds in the 1950s in order to improve harvest figures or when they melted saucepans, forks and spoons in order to improve iron production figures.
If they want to prevent foreigners from buying inexpensive Chinese stock, they could print money and buy stock or use the foreign currency they now spend on propping up the Yuan for buying Chinese stock.
In order to make themselves more popular, the Chinese government could give the stock they have bought to their citizens. They could create some kind of retirement accounts that would not allow people to sell their stock until they retire or swap Chinese stock for foreign stock or other foreign assets. Thereby, increased assets for the general public would not generate that much capital outflow (or inflation if people begin to spend their assets).
It also seems as if the Chinese leaders have forgot that small savers are less inclined to move their assets abroad than people who are familiar with foreign markets and are not afraid to move their assets abroad. It should also be easier to lock the assets of the general public so that they can´t move their assets abroad than to do the same for those who are rich. I suspect that the Chinese leaders made a mistake when they neglected the need for increased prosperity among ordinary people. They would probably have been more popular among the general public if they had given them some extra savings. They also get a capital outflow problem if those who have money are those who can move them abroad.