"Global Shock Absorber" China Holds Currency Stable, Margin Debt Rises For 7th Day

Offshore Yuan continues to trade at a discount to onshore against the USD (imply a modest further devaluation is due) but the spread is narrowing and today's practically unch Yuan fix is dragging USDCNH lower (stronger Yuan). Yesterday's afternoon session ramp in stocks managed to extend its gains as margin debt rises for the 7th straight day. The PBOC injects 120 bn Yuan liquidity via 7-day reverse-repo (notably more than the 50bn maturing), as HSBC's Stephen King concludes, the message from last week's surprise devaluation is clear - China no longer wants to play the "global shock absorber" role - instead is more focused on domestic instability... and there is no other nation yet willing (or able) to shoulder the responsibility.


And offshore Yuan is fading...

  • *PBOC TO INJECT 120B YUAN WITH 7-DAY REVERSE REPOS: TRADER - The most since February

The People’s Bank of China stepped up injections via reverse-repurchase agreements Tuesday to offset a tightening in the money market.


The central bank sold 120 billion yuan ($18.8 billion) of seven-day reverse repos, according to a trader at a primary dealer required to bid at the auctions. That compared with 50 billion yuan maturing Tuesday.

Rather ominously HSBC's chief economist Stephen King has a common-sense explanation for how China ended up here...

... and where we go next...

China’s role as a “stabiliser” for the global economy has contributed to instability within China itself.



Yes, the global economy has done better as a consequence of China’s behaviour but, for China, there have been significant costs: an overheated property market, a substantial increase in indebtedness, a roller-coaster ride for the stock market, a highly leveraged shadow banking system and a declining marginal rate of return on capital spending...


It is easy to criticise China’s internal imbalances. Doing so without taking into account the role of those imbalances in stabilising the global economy is, however, a major mistake. It doubtless makes sense for China now to address its internal imbalances. Yet, in doing so, the rest of the world needs to find a new shock absorber. It’s not at all obvious whether any economy is really up to the task.

Simply put, a stronger USD will crush an already fragile US economy and Europe is hardly ready for a strengthening currency and to 'absorb' the world's deflationary pressures. With no obvious shock absorber on the horizon, China just passed the hot potato back to The Fed - hike rates, help the world stabilize at the cost of the domestic economy... or don't and currency wars escalate (not helping US) and global deflationary pressures hit (just as we are seeing in commodities and high yield bonds).