Yuan Pain Commences

SCMP: ICBC, China Construction Bank score the biggest gains in years after PBOC cuts reserve ratio
On Saturday, the PBOC announced it would cut the reserve requirement ratio (RRR) for some banks that meet certain requirements for lending that supports small businesses, agricultural production, entrepreneurship, and education, effective 2018.

China International Capital Corp said in a recent research report that the targeted RRR cut will cover all the large and medium-sized banks, 90 per cent of urban commercial lenders, and 85 per cent rural commercial lenders.
The move is estimated to inject about 220 billion yuan (US$33 billion) of liquidity into the market...
Central banks don't cut interest rates and ease liquidity during an economic recovery, during a tightening cycle. Chinese monetary policy is at cross purposes with the Federal Reserve. This year's yuan rally will end up being very expensive and ultimately useless. Except for the bearish traders. (Thanks again PBOC!)

Alhambra: Aligning China To The Deficient ‘Dollar’
The more “dollars” that arrived on the balance sheets of Chinese banks, the more the PBOC raised the RRR especially for big banks. This is the basis for the very close correlation between CNY and the RRR.

China’s major monetary problem since 2013 has been the opposite condition – fewer “dollars” both in the private sector as well as the central bank channel (limited float means the PBOC is managing and conducting some transactions, just not as many or in the same sizes as a peg). To counteract that reduction in base RMB money, the PBOC has several choices.

In late 2014, the central bank met the initial reduction in forex with a reduction in the RRR. It was textbook orthodox monetarism whereby the private banks were empowered to deal with fewer “dollars” by being able to still increase their RMB activities with less RMB held as statutory reserves.
China announced the RRR cut ahead of time (and during the holiday) because it won't affect the yuan market. China also won't have to announce a cut when bearish expectations would send the yuan tumbling. Finally, the cut is flexible. China might try quietly easing the rules for the current RRR cut instead of making another announcement.

Jeffrey Snider alerts us to a repo fail pattern associated with dollar rallies and financial market instability: Three Straight Weeks Can’t Be Ignored
The Federal Reserve Bank of NY reported on Friday that repo fails for the week of September 20 were $359 billion (combined “to receive” plus “to deliver”). That’s the second highest weekly total of this year, following $435 billion fails recorded just two weeks earlier. The week in between those two was also high, tallying $325 billion.
That makes for three consecutive weeks of unusually high repo fails.

...The last time that [three weeks in a row of at least $250 billion fails] happened was for five straight weeks beginning last November during the big bond selloff, and then earlier in 2016 in March (Japan problems). Before those there were four weeks in December 2015 just prior to the second wave of global liquidations, and then for three weeks in June 2014 kicking off the whole “rising dollar.”

...Three weeks (and perhaps longer) simply confirms that this is some kind of warning. I’m hoping some of the less frequent monthly data will provide some answers, but unfortunately most of that won’t be available for some time (in the case of TIC, it won’t be released until November). Until then, we have to keep watching price movements for clues as to what kind of warning, possibly, this might be.

No comments:

Post a Comment