PBoC Rate and RRR Cut Replaceds One Week of Outflows

China is conducting monetary policy to support the domestic economy, not the yuan.

ZH: The Most Surprising Thing About China's RRR Cut
So how does one reconcile China's reported detachment from manipulating the stock market having failed to prop it up with the interest rate cut announcement this morning.

The missing piece to the puzzle came from a report by SocGen's Wai Yao, who first summarized the total liquidity addition impact from today's rate hike as follows "the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today's onshore exchange rate." And then she explained just why the PBOC was desperate to unlock this amount of liquidity: it had nothing to do with either the stock market, nor the economy, and everything to do with the PBOC's decision from two weeks ago to devalue the Yuan. To wit:

In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.

And there is the punchline. It explains why the PBOC did not cut rates over the weekend as everyone expected, which resulted in a combined 16% market rout on Monday and Tuesday - after all, the PBOC understands very well what the trade off to waiting was, and it still delayed until today by which point the carnage in local stocks was too much. Great enough in fact for China to not have eased if stabilizing the market was not a key consideration.

In other words, today's RRR cut has little to do with net easing considerations, with the market, or the economy, and everything to do with a China which is suddenly dumping a record amount of reserves as it scrambles to stabilize the Yuan, only this time in the open market!

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