China has two problems... well more than two we are sure, but these seem critical.
First, there is a significantly slowing economy that 'desperately' needs the hand-of-god Central-Banker to stimulate it with free-money - but is hand-cuffed by the huge disconnect between 'apparently' low CPI and extreme highs in food and energy prices which will only exaggerate spending retrenchment should any money-printing be enabled.
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and with Corn stocks at a stunningly low level (lowest since 1995 and nearing 1975 levels) things are only going to get worse...
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Which leaves the PBOC somewhat powerless to do the kind of massive stimulus hole-digging-and-re-filling that is required to plug the economic demand slack.
Second, it seems for many investors the writing is on the wall as money is flowing out of the world's growth engine faster than oil from a wok. While at the surface USDCNY appears to be doing its 'stable' thing - the PBOC is soaking up unprecedented amounts of CNY as the market 'sells' out.
This chart (that we previously discussed in detail here [8]) shows the difference between market-driven movements in USDCNY (red) and PBOC-driven (blue) - clearly the market is selling its CNY and running away and while we are sure China would like a lower Yuan (to help exports etc.) it is nevertheless band-ridden and needs to maintain some stability or trade-wars or worse will escalate - so the PBOC is soaking up massive amounts of Yuan (and selling out its USD?) to maintain that illusion of control...
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These 'adjustments' which are now on an unprecedented scale started right after LTRO2 ended and are accelerating...
which is leading to forward-Yuan trading at post-crisis high discounts...
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This combination of slowing (and seemingly unstoppable) economic trajectory with significant negative money-flows is a vicious circle - evidenced by the efforts of the PBOC with stealth reverse repos and the 'easing' of their Yuan trading bands (chart below - as per Bloomberg's Chart of the Day) as perhaps they revert back to a weaker Yuan policy (and implicit strong USD mercantilist vendor-financing model).
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Charts: Bloomberg and Diapason Commodities