PBoC Short Dollars to Defend Yuan; The Outflow is Deflation

Jeffrey Snider of Alhambra details the currency risk in China, by way of the global financial system.

What's Going On In China Is Not Really About China

That was the condition that greeted the first maturities of China's swaps and forwards. Starting on November 6, exactly three months later, the CNY rate has plummeted, touching almost 6.60 yesterday! The PBOC gained three months or so of relative calm in order to make its problems that much worse in the near future - because they assumed that the future would be at least enough past the disruption in "dollars." Instead, the turmoil has worsened and amplified because the derivative activities of wholesale currency intervention made for a bigger "short" when being short was still the primary problem.

The potential for calamity now is as Zhou mentioned in March 2009, that the credit-based reserve currency is too unstable to provide a solid foundation for global growth. Instability may just be intrinsic in a system focused and grounded in esoteric and complex bank liabilities and creations; many of which we still have yet to uncover and understand. What is easily understood, however, is that by whatever means, including compression trading, banks are no longer willing to be that central role in currency expansion, or what might traditionally be understood as tightening or outright shrinking money supply. If there is one country that appreciates what that means and the implications for it, it is China. Again, the eurodollar build up built that economy, and the eurodollar decay is tearing it down. If there is truly desperation to it, it is because there is permanence here unlike 2008, which was treated as a cyclical and temporary interruption.
Well worth reading the whole thing.

While China is not responsible for the global financial system, it "gamed" the system to the max and danced as if the music would never stop. They are not unique in this, but they are unique in the relative and absolute size of their emerging market credit bubble.

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