Chinese Central Bank Crushes Yuan Shorts, Launching Bitcoin Buying Spree

Tyler Durden's picture

With the Yuan having traded within fractions of what many consider a key psychological level for the USDCNY at 6.70, many traders expected that following the just concluded G-20 meeting in China, the PBOC would finally relent in its devaluation defense, and let the currency slide on through to the other side. Not only did that not happen, but overnight the Chinese Central bank unleashed one of the most furious attacks on currency Yuan shorts since the January devaluation scare when the cost of borrowing yuan in Hong Kong soared to a seven-month high amid.

The overnight HIBOR, or Hong Kong Interbank Offered Rate, jumped - seemingly without reason - by 3.88% points to 5.45%, the most expensive since February, according to Treasury Markets Association data. Other tenors joined with the one-week rate rose 2.09% points to 4.06%.

As Bloomberg confirms, the PBOC "may have tightened liquidity in the offshore yuan market to control declines following speculation that it would allow depreciation now that a Group of 20 summit is over, according to Mizuho Bank Ltd. The monetary authority drove offshore yuan borrowing costs to unprecedented levels in January in an effort to punish bears."

Ken Cheung, an FX strategist at Mizuho Bank, said that “everyone was talking about depreciation after the G20 meeting, and China could be reacting to that." To be sure, the monetary authority was aware of the coming short attack as well, and simply preempted it by making costs of borrowing prohibitively expensive. As Ken adds, "the authorities may be repeating January’s trick - tighten liquidity and crack down on bearish speculation on the yuan."

The mechanics of the move, used often in January and February when the Yuan was seemingly sliding every day, are as follows (courtesy of Bloomberg): China’s central bank influences funding costs in Hong Kong by encouraging state-owned banks to hold back from loaning their excess yuan. A surge in yuan Hibor hurts bears in two ways: by increasing the cost to borrow the currency and sell it, and also by prompting lenders that want to avoid paying the higher rates to buy the yuan they need in the spot market instead, bolstering the exchange rate.

It is unclear if the PBOC's move, which to some smells of desperation, will have a long-lasting effect: the offshore yuan has dropped 0.6% versus the dollar since the start of August as Chinese data failed to quell concerns over the nation’s economic health and the Federal Reserve indicated it could raise borrowing costs this year. Furthermore, some banks such as JPM have voiced a certainly that China will cut rates by at least 25 bps in the coming months - a move which would further weaken the currency. As a result, depreciation bets have resurfaced in the derivatives market, with a three-month measure of expected yuan price swings surging the most since January last month. The offsetting good news, as reported this morning, is that the weaker yuan helped Chinese exports drop less than expected in August.

Meanwhile, the bogeyman for China, capital outflows, continue, and as China reported on Wednesday, the latest foreign reserve total dipped by $16 billion to $3.185 trillion.

While capital outflows have eased from record levels last year, firms and individuals still appear uncomfortable with exposure to China’s currency. A Bloomberg gauge of local companies’ willingness to convert foreign currencies into yuan is near a record low, while an unprecedented overseas acquisition binge suggests strong demand for exposure to foreign assets. A net $55 billion flowed out of China in July, compared with $49 billion in the previous month, according to calculations by Goldman Sachs.

Yet as outflows have persisted, the Yuan has done very little in recent months, which has spurred speculation that China’s central bank was propping up the exchange rate to deflect criticism of its policies during the G20 meeting, and that it would allow depreciation before the yuan’s entry into the International Monetary Fund’s reserves on Oct. 1. It appears that the PBOC was eager to not only reject such speculation, but to crush any news Yuan shorts.

Confirming that there was a directed intervention aimed at punishing shorts, Bloomberg adds, that the gap between overnight forwards and the spot rate in Hong Kong, so-called forward points, jumped to 20, the highest since February. The increase suggests the yuan’s supply was squeezed, according to Zhou Hao, an economist at Commerzbank AG in Singapore. The offshore currency rose to as high as 6.6637 per dollar before weakening 0.02 percent to 6.6725.

"The authorities could be trying to dry up liquidity in the offshore market in order to reduce bearish bets, as the exchange rate approached the sensitive level of 6.7 a dollar earlier," said Banny Lam, head of research at CEB International Investment Ltd. in Hong Kong. "There’s still very strong expectation for the yuan to depreciate."

For now the PBOC has won the battle, however it will likely lose the war: as Frances Cheung, head of rates for Asia ex-Japan at SocGen told Bloomberg, "front-end forward points coming off earlier highs suggests the squeeze could be temporary. The less flush offshore yuan liquidity conditions - as various flows subside - could amplify the movement in front-end rates should there be a sudden need for liquidity."

* * *

Meanwhile, just as the PBOC intervened in the FX market, a new leak sprung in a totall different place: just as the central bank was squeezing Yuan shorts in Hong Kong, Bitcoin soared higher by another 3%, driven by a surge in buying on the Chinese Huobi exchange, sending the price for the digital currency back to a 1 month high.

As we first reported over a year ago, when it was trading at $230, bitcoin has become the "capital outflow alternative" of choice for numerous Chinese, and based on historical patterns, any time Chinese capital outflows spike, or the PBOC engages aggressively in preventing these, the price of bitcoin jumps, just as it did overnight.

Going forward the PBOC may be forced to intervene not only in the spot FX markets but also to short BTC as the local population gets increasingly creative in finding ways to bypass China's great monetary firewall.

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Dragon HAwk's picture

The Algo's and Derivative bettors are going to rip these Manipulators a New Asshole.  All over the planet i Might Add.

VD's picture

Kyle Bass's sphincter tightened up so hard overnight, he went full-Ackman long Preparation H.. 

 

(when you're bending over trying to pick up nickels in front of the steam roller, and the central banker is right behind you no lube, no reacharound, not even a kiss......poor Kyle limping around his compound today....)

matt1970's picture

It's a great time to learn about Bitcoin and other cryptocurrencies!

The Age of Cryptocurrency
https://permaculturegrower.wordpress.com/2016/09/08/the-age-of-cryptocur...

Panic Mode's picture

I need to sell all my gold and buy bitcoins

SomethingSomethingDarkSide's picture

"OH HERRO" - Maniacal Panda

ilovetexas's picture

So the wishful thinking goes on and on. It has become a religion to bet the fall of the Chinese RMB. Yeah, yea, yea, the reserves are declining. But is that all you need for a currency to fall against US dollar? What about the weakness of US dollar? You just have to remember the currency exchange rates are relative. In a weak US dollar environment, with a determined Chinese government, which runs a centralized economy, how much hope do the RMB shorts have? It's a tough game, potentially a complete waste of time and money.

LawsofPhysics's picture

Correct. People seem to forget that the Chinese invented paper money for fuck's sake.  They are a single-party, STATE-run operation. Some can argue, fairly successfully, that this government has no problem with exterminating it's own people as well.

shitco.in's picture

Yes, there were thousands of Chinese just waiting to click their mouse with non stop buying because of PBOC intervention in the FX market. 

This led to a a volume of 65,270 BTC traded in 1x - 15m candle on Huobi, including bots because it's a 0 fee exchange. 

Looking at the 1 minute chart - https://www.tradingview.com/x/z0DyzvTW/

You will see that the majority of the move happened in two minutes. 

Maybe one day ZH will get their BTC facts correct. 

LawsofPhysics's picture

What part of "it's all bullshit" is incorrect exactly?

 

LOL!

shitco.in's picture

We all know that "it's all bullshit". 

ZH consistently reports inaccurately on what's going on with BTC though. 

It would be valuable to readers if their articles represented what was actually going on with bitcoin. 

For example, in their last post which attributed the beginning of the btc selloff to "the fed". 

 

The hack was known about for days, and posted on Twitter two days before the hack - 

https://twitter.com/_cryptoworm_/status/759887358208638976

 

There were also shorts building on OK Coin futures as test hacks happened in the days leading up to the "hack" - 

https://twitter.com/Beetcoin/status/761299853985058817

 

By conveying this information to readers, instead of attributing the dump to the fed, people who browse this site would walk away with actual knowledge instead of just looking at an inaccurate comment on a chart. 

LawsofPhysics's picture

Stupid is as stupid does...

let evolution work for fuck's sake.

MoonSun's picture

Hummm... So you provide a tweet with three retweets which basically says nothing to justify your pointless rant. Stop being an arsehole and be constructive.

ilovetexas's picture

I found it always funny that someone keeps on arguing about why one pile of shit is more valuable than another pile of shit. They are just two piles of shit, got it? Both are shit! What's the point?

Justin Case's picture

As long as you can still buy shit with it. With currency it's better to have a wheelbarrow to go shopping with. I saw pictures of kids carring $300,000.00 Zimbabwe dollars which was worth a litre of gas.

A lady said she offered a street vendor $2,000,000,000.00 for a mango and he told her $3billion b/c tomrrow they'll cost $4 billion. While masses were at river beds panning for gold. Quite the scene. None of them had bitshit.

Silver and gold coins are good for exchange even when the power grid or net go down for some unknow reason that usually occurs during restless times, not to mention overloads and weather.

firstdivision's picture

Anyone guess how there was a 14.5mbb draw? 

Justin Case's picture

nah, he has gold, not bitcoins.

Consuelo's picture

 

 

Aside from China crashing & burning into a pile of 3rd-world rubble, nearly every day since 2008 - if one is to believe countless websites & blogs pissing themselves about it on an ongoing basis...

The ~only~ thing that matters for the Chinese and the ¥RMB (and the American standard of living by extension), is ~when~ the Chinese decide to take that gold they have, and Employ it.   Which they most certainly will.   

LawsofPhysics's picture

The Chinese have no intention of being that transparent.  They are in a very sweet position, not being a reserve currency.  They will maintain their print and buy real useful shit mode for as long as they can, period.

Seasmoke's picture

Hey look at that. Bitcoin UP = Gold DOWN. Again. Must just be a coincedence. NOT !!!!

LawsofPhysics's picture

Odd, all of my ounces are still there, haven't changed a bit.

"When fraud is the status quo, possession is the only law"

aminorex's picture

When China discovers Monero it is going to be huge.

E5's picture

violence will beat your possession any day of the week.

Do you really think they won't give people a third of your gold's "value in paper money" for telling you have it?  Good luck making a trade.

 

Convert your gold into a business with a useful high skilled labor, resources and machines that makes sense to you.  Every party will want you to keep producing and you have trade.  If you think you are going to transport gold by all the electronic atomic weight sniffers you are not paying attention to what L3 has been building for your local pigs.

Solosides's picture

The technotronic takeover is already so complete, that it's already far too late for most of the Goyim.

 

They will open the first FEMA camps as "FUN CAMPS!". They will provide XBOX, Playstation, VR headsets, free wifi, and all of the monsanto garbage you can possibly eat. And the general population will be SCREAMING to get inside one of these camps.

 

A friend of mine, last year, explored the abandoned part of Western State Hospital (mental facility in Tacoma, WA). He said that the facility had a brand new EVERYTHING, with massive holding areas with 14 foot barbwire fences. It looked as if the contractors had just cleaned up and finished the job hours ago. The other people with him could not see any significance in all this new equipment for an abandoned mental hospital.

Justin Case's picture

I see another security breach and theft coming, but not to worry, it gets spread out amoungst all players like a social group.

Justin Case's picture

JPMorgan CEO Jamie Dimon has issued new remarks about bitcoin, dismissing the digital currency's potential to survive in the long-term.

"This is my personal opinion, there will be no real, non-controlled currency in the world. There is no government that's going to put up with it for long ... there will be no currency that gets around government controls."

Capital gains and taxes are a major income for Gov'ts and they ain't gonna give that up, period!

 

Dai hav da powa!

Solosides's picture

"there will be no currency that gets around government controls."

 

Not when the pigs will eventually require you to bribe them with bitcoin. Kind of like third-world hell holes where diamonds are king and cash is burned.

monad's picture

Those kooky Chinese. Same old same old.