China Blinks: Why Beijing's Currency Intervention Is Doomed To Failure

The People’s Bank of China today announced a re-introduction of reserve requirements on FX forwards trading which it had eliminated last September just after the Yuan soared against the dollar – a move aimed at taking pressure off the renminbi as the USDCNY rapidly closed in on 7.00. However, as ING's Chris Turner writes, this looks only a temporary reprieve for the renminbi as all prior PBoC attempts to stem CNY weakness haven't been all that successful in reversing a trend.

Reserve requirements back in play

Since 2015 the PBOC has used reserve requirements on FX forward transactions as a tool to control ‘macro-financial risks’. The measure puts a 20% required reserve ratio for financial institutions when conducting onshore CNY forwards business on behalf of customers. The move makes it effectively costlier for the market to fund short CNY positions through the forwards market.

This measure was first used for domestic financial institutions in October 2015 and then broadened to include foreign institutions in July 2016 when USD/CNY was pushing above 6.70. These reserve requirements were scrapped when USD/CNY was dipping below 6.50 in September 2017 amidst broad dollar weakness.

Prior PBoC attempts to stem CNY weakness haven't been all that successful

ING, Bloomberg

Why now?

It seems pretty clear that these measures have been introduced to trigger a squeeze in short CNY positions and keep USD/CNY away from 7.00. This reserve requirement is a relatively soft measure and avoids the bigger stick of FX intervention or rate hikes at a time policymakers are delicately deleveraging the economy.

We also think Chinese policymakers had a bad experience when USD/CNY was last trading near 7.00 in late 2016. Investors struggled to digest the message at the time that the renminbi was stable versus the basket and that the move to 7.00 was all about the dollar. That message will be so much harder to deliver today given the 6% decline in the renminbi against its trading basket since late June and the uncertainty over whether this is a market-led decline or the PBOC is using the renminbi as a weapon in the current trade war.

Temporary reprieve

USD/CNH has sold off 1% on today's (Friday) news, but we doubt investors will be encouraged to return to Renminbi exposure anytime soon.

US Commerce Secretary Wilbur Ross has made the US trade position clear by outlining that Washington wants to create a situation where it’s more painful for China to continue current practices than it is for China to reform.

An increase in the proposed tariff rate to 25% on the next $200bn worth of Chinese imports looks likely over coming weeks. And combined with firm US rates and what look like continued dollar strength over coming months, it looks as though the PBOC will be forced to use more of its currency toolkit to prevent USD/CNY going through 7.00.


silverer Fri, 08/03/2018 - 16:13 Permalink

Oops. China wasn't dealing with just another easy to bribe and influence politician. They just found out they were dealing with a drop-forged well experienced business man. Trumped 'em up, he did.

jt_54321 Fri, 08/03/2018 - 16:17 Permalink

An honest question...  When I hear this kind of news daily -  

(1) Harley Davidson is shifting to Thailand

(2) Tesla is planning to invest heavily in China manufacturing..  How can Trump succeed with China??


We are still not ready for

(1) competitive wages with less welfare and

(2) Govt policies favor only the top 1%, rather than American working class or any major infrastructure development.....


In the end China might cave in just before elections (similar to Europe, nothing in real) and Dow will hit 30,000!!

Mewa Fri, 08/03/2018 - 16:20 Permalink

yuan has been a lot more stable the last couple of years compared to the US dollar....lately its been pegged to gold and liquidity for physical gold in the west is moving into crisis mode just when the Yuan oil futures contract goes into delivery next month....Lets see how the US dollar fairs when that hits....the PBOC's policy is a stable Yuan currency despite the US attempts to destabilize trade. At some point the US will have sanctions on everyone else around the world and then they will cry nobody wants to trade with them......the bully in the schoolyard. Their leaders are morons and yet they expect everyone to follow.....

JPMorgan Fri, 08/03/2018 - 16:30 Permalink

China has a few ways they could strike back, whether or not they will go into full retaliation mode remains to be seen.

One thing it will do is strengthen China-Russian trade ties even more, both countries appear to have the same imposed western problems. 

radbug Fri, 08/03/2018 - 17:05 Permalink

Trump could summon the PRC ambassador & give him a piece of paper, viz., an international law-compliant Declaration of War. Pursuant to the ANZUS Alliance, when America declares war, so must Australia. So, what then happens to Australia's huge hard commodity trade with the PRC? Australian Prime Ministers since Bob Hawke have done contortions circus performers would be envious of to balance off Australia's security relationship with the US & its economic relationship with the PRC. I think that this will be the decade that Australia falls off the tightrope.

Chief Joesph Fri, 08/03/2018 - 18:28 Permalink

Another one of these idiotic articles, that has no validity to it.  Its all dreamed up nonsense.  Even the monetary exchanges, European, and Japanese markets will tell you that.

JibjeResearch Fri, 08/03/2018 - 19:44 Permalink

We have a trade deficit.  The last thing we need is a currency war!

When the Yuan is devalued to 7 per 1 USD, China is winning in the export to other nations.

**** Winning export to the USA is just gravy on top ....***


Why are our dumb fagfucks MAGA can't understand this doubled sword?

Get the doggon marginal cost down if we want to export more to other nations!

Let it Go Fri, 08/03/2018 - 19:51 Permalink

It is not just about currency!

People are naive if they do not recognize the distinct advantage a state-driven economy has over free enterprise, at least initially. A bit predatory in nature, such a system can quickly exploit the weaknesses of its competitors. It is important we recognize China is a state-run economy based on a business model that is geared to expand by crushing the competition.

Subsidizing those companies working within its system in a multitude of ways helps it achieve this goal. Countries that export goods at slightly below cost in exchange for manufacturing jobs are not stupid they are predatory and we in America are their prey. The article below explores the ramifications of this.

 http://China State-Driven Business Model.Geared To Expand html