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" [12] 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
[13]
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 [14], 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:
[15]
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.
[16]
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
[17]
But the money continues to flow aimlessly into the "last bubble standing" as we detailed previously [12] with record low corporate bond yields in China (despite a collapse in creditworthiness fundamentals and huge supply).
[18]
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
