Markets Spooked After China Central Bank Announces More Rate Liberalization, Yuan Internationalization

As quick primer on China: the more something is "liberalized", the worse it is for local - and global - risk assets since all risk "assets" in China are so grotesquely manipulated, the resulting price discovery is always violent and spills over to the rest of the world as 2016 has so far demonstrated; alternatively, the more the government intervenes to stabilize any given asset, the better it is for local - and global - risk assets, as it means the distortion in price levels and capital allocation will continue at least a little longer, i.e., the proverbial can kicking, even if it means the hangover will be that much worse.

Which is probably why the catalyst for the futures swoon experienced moments ago, which brought the S&P futures back down to unchanged since China's FX announcement last night, was a Reuters story according to which China's PBOC is preparing to further liberalize interest rates while further internationalizing the Yuan, translated: even more devaluation + even less intervention = bad for risk.

  • U.S. STOCK INDEX FUTURES PAIR GAINS SLIGHTLY AFTER CHINA'S CENTRAL BANK SAYS IT WILL FURTHER LIBERALIZE INTEREST RATES - RTRS

More:

  • CHINA CENTRAL BANK: TO FURTHER LIBERALISE INTEREST RATES
  • CHINA CENTRAL BANK: TO MAKE YUAN MORE INTERNATIONAL
  • CHINA CENTRAL BANK: TO MAINTAIN PRUDENT MONETARY POLICY
  • CHINA CENTRAL BANK: TO FLEXIBLY USE MONETARY POLICY TOOLS TO KEEP ADEQUATE LIQUIDITY IN BANKING SYSTEM
  • CHINA CENTRAL BANK: TO KEEP USING MLF, PSL AND CREDIT POLICIES TO SUPPORT KEY AREAS IN THE ECONOMY
  • CHINA CENTRAL BANK: TO FURTHER IMPROVE CURRENCY FORMATION MECHANISM
  • CHINA CENTRAL BANK: TO KEEP YUAN BASICALLY STABLE
  • CHINA CENTRAL BANK: TO DEEPEN REFORM OF FX MANAGEMENT SYSTEM AND FINANCIAL INSTITUTIONS

The full statement can be found here, and the full story from Reuters:

China's central bank said it would further liberalise interest rates, according to a statement posted on the People's Bank of China website on Friday.

 

The central bank also said it would make the yuan more international, keep the currency basically stable, further improve the currency formation mechanism and deepen reforms of the foreign exchange management system and financial institutions.

 

The central bank will use medium-term loans, and pledged supplementary loans and credit policies to support key areas of the economy.

 

The central bank also said it would maintain prudent monetary policy and flexibly use monetary policy tools to keep adequate liquidity in the banking system.

We wonder how long until the PBOC "retracts" this story following the adverse futures reaction. After all, if this week has taught us anything it is that when it comes to policy, in China everything is now dictated by market.