China Group Says Cripple Payments System to Fight Yuan Bears

WSJ: A New Yuan Trade: Target Short-Sellers, a Group Says
Now a state-backed association is offering a suggestion to crimp short trading in the offshore market: use the newly established international system for yuan payment. The China Association for the Promotion of Development Financing, which is run by state policy lender China Development Bank, said Beijing should reduce the supply of yuan in the payment system as a way to discourage short-selling.

The payment system–the China International Payment System, or CIPS–was launched last October to process cross-border yuan transactions, as part of Beijing’s efforts to boost global usage of the currency.

After its launch, a big chunk of yuan liquidity was pumped through the CIPS to offshore markets, where the pool of yuan currency is relatively small. In an article published last week in the central bank’s newspaper, Financial News, the China Association urged the People’s Bank of China to use “window guidance” to tell Chinese banks to reduce the amount of the yuan funds available in the offshore market when short-selling arises.
The PBoC says it's not interested in the tactic:
Asked its opinion of the article by China Real Time, the central bank said, “It’s inaccurate that the People’s Bank of China uses the CIPS to adjust offshore yuan liquidity.” In a statement, the central bank reiterated that it will let markets play a more decisive role and that it’s improving the yuan exchange rate mechanism to make it more market-oriented.
With renminbi internationalization already coming into question, the use of the payments system to squeeze liquidity would be nuts. First, it would for the yuan higher, against market wishes. All this does is make outflows more attractive and sets bears up for another run. Second, it makes the yuan less attractive because of the tight liquidity, which effectively lowers the long-term value of the yuan. This isn't going to show up in the price immediately, and maybe never if it was a one-time tactic, but abuse of system control eventually leads to major failures. The United States abused its control over the SWIFT system and the result is competing systems. China's advantage has been its separation of economics from politics, dealing with nations without interfering with sovereignty. If it must resort to breaking its own payment systems in order to fight short-sellers, the yuan will struggle to gain international status.

The fastest way to get an international yuan is to flood the global economy with yuan, increase credit availability, and let the yuan find its market price. China doesn't want to move quickly on internationalization, and even putting that aside, reducing liquidity in the middle of a global depression is the very opposite of a sane policy.

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