Beijing Scrambles To Hammer Yuan, Sets Fixing At Weakest On Record Vs Estimates

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by Tyler Durden
Friday, Dec 10, 2021 - 03:44 AM

Just two days ago, we made a simple observation: in a world, where virtually every central bank was tightening, China was now aggressively easing - something we said would happen months ago when we discussed the plunge in China's credit impulse - even though the "experts" said this was impossible with PPI inflation running red hot in the double digits (the experts were wrong).

Then, just two days later, with the Yuan clearly ignoring the PBOC's very clear and direct easing intentions (and actions) and continuing to surge, China made it very clear that it will no longer tolerate a stronger yuan early this morning, when Beijing hiked its FX reserve ratio from 7% to 9%, pushing the yuan sharply lower.

Even so, some were not convinced that the Chinese central bank means business and proceeded to bid up the offshore yuan overnight into Friday in China. So, just to make it clear that the PBOC is serious, moments ago the PBOC sent out another clear shot across the bow of higher yuan expectations, when it fixed the yuan at a whopping 179 pips higher than consensus at 6.3702. This was the largest miss vs surveyed market participants' fixing expectations on record, and followed China’s fix on Thursday which was already the largest miss since Oct. 14.

The news promptly sent the CNH sliding further, dropping as far as 6.3893 against the dollar...

... before sharply reversing, making China's life even more difficult in the process.

As Bloomberg's Simon Flint writes, "this is an extremely strong signal, and should prolong the impact of the policy change announced on Thursday"... only as shown in the chart above, it did just the opposite and the yuan actually strengthen shortly after the kneejerk reaction.

In any case, as Flint further notes, the average deviation in December is now around +32pips, more than double the January “record” of 14pips for 2021. In this respect, he writes, "the fairly obvious use of a de facto counter-cyclical factor (CCF) throughout 2021, despite CCF’s supposed suspension back in October 2020, begs the question as to why the authorities don’t admit to explicit use of CCF."

An official announcement of the reintroduction of CCF, along with an explanation for its reintroduction -- i.e. that there is herding behavior or one-way expectations -- would intensify its signal. However, this may be a last resort, given that such an announcement may open up the authorities to charges of obvious FX manipulation.

... which of course would be problematic with the US just days earlier absolving China - and every other country - of FX manipulation in the Treasury's biannual report (in which it did however criticize China of a lack of transparency on the yuan).

In any case, as noted earlier in the previous post that the "PBOC May Do More To Curb Yuan After Drawing Line", the rebound in the Yuan despite the record low fixing vs expectations, means that the PBOC will have to aggressively pursue one of the four options, previously delineated by Goldman:

  • More verbal warnings against one-way bets
  • Officially adding back the countercyclical factors to its yuan fixing, essentially setting the yuan weaker than otherwise
  • Accumulate dollar reserves and/or ask state banks and experts to hold dollars
  • Liberalizing FX outflows and tightening the channels for inflows.

Among these tools, as Bloomberg's Ye Xie noted, "the most effective would be allowing more outbound investments to offset the inflows." But while authorities have already done some of that, including the launch of the Southbound bond connect that allows local residents to buy overseas bonds in Hong Kong, clearly it is not enough.

Which leads us to a very ironic question: will China realize what has been clear to the Fed for so long, and use cryptocurrencies as an excess pressure "release valve", in this case letting cryptocurrencies absorb a measured amount of FX outflows to avoid further overheating in the yuan.

Of course, for that to happen, China will have to unburn all those bridges it torched mercilessly earlier this year when it sought to crush bitcoin in its foolish pursuit of widespread acceptance of China's epic FX flop, the communist surveillance apparatus that is the digital yuan (which has so far been a catastrophic failure). Still, if it means avoiding an overheating currency just as China's GDP is set to drop below 5% for the first time in its modern history, we are confident that Beijing will find a way to "look the other way" as China's oligarchs park several hundred billions Yuan into cryptos...