The Game Is Afoot: PBoC Raises Knife At Speculators

Reuters: China’s yuan firms as central bank keeps pressure on speculators
China’s yuan rose on Monday as the central bank announced a fresh move to deter offshore speculation in the currency, while stocks rebounded modestly from near levels last seen at the depths of last year’s summer crash.

The People’s Bank of China (PBOC) said it would start implementing a reserve requirement ratio (RRR) on offshore banks’ domestic deposits, in a move that seemed intended to soak up additional liquidity.

“The market sees that this is a gesture by the PBOC to warn speculators that are betting on a fast depreciation of its currency,” said Zhou Hao, senior emerging markets economist for Asia at Commerzbank AG in Singapore.
Nothing like soaking up liquidity amid a massive wave of deflation.

Barron's: PBoC Tightens Screws on Yuan Speculators
iFeng: 外媒:人民币保卫战升级?中国央行对国际空头举屠刀

The PBoC is dealing with symptoms. The futures market hasn't really budged despite the latest moves by the PBoC and the drop in CNH in recent days. Long-term yuan bears are betting these moves will have temporary impact because the fundamentals are moving against the central bank. Furthermore, recall posts from yesterday: Chinese Dollars Have Stopped Flowing and Banks Ponder Unwinding of Hundreds of Billions in Currency Arbitrage. Are speculators the target, or is the PBoC tightening the noose around Chinese borrowers? If you are an "accidental" currency speculator (believing the yuan would always rise or remain stable, and thus seeing your massive USD loans and RMB WMP investments as near risk-free interest rate arbitrage instead of a high risk currency+interest rate arbitrage) the torschlusspanik must be close to setting in if it hasn't already.

As for the deeper fundamentals.
Bloomberg: China's Hot Bond Market Seen at Risk of Default Chain Reaction
Credit derivatives that are seen as a gauge of risk in the market have spiked 22 basis points since Dec. 31, the worst start to a year in data going back to 2008. The number of listed firms with debt double equity has jumped to 339 amid a weakening economy, from 185 in 2007. Traders surveyed by Bloomberg in December said note failures will spread.

“2016 is a year when we will see systemic risks emerge in China’s credit market,” said Ji Weijie, credit analyst in Beijing at China Securities Co., the top arranger of bond offerings from state-owned and listed firms. "There may be a chain reaction as more companies are likely to fail in a slowing economy and related firms could go down too."
Bloomberg: China Hits a Bump, or Two, on Road to an Internationalized Yuan
China is caught in a dilemma as it pushes toward eventually letting market forces determine the yuan’s value, but in the short term clings to old government controls to defend the currency and prevent a capital outflow that could harm stability and dent economic growth. What’s not clear is how the heavy-handed state measures will go over in the 20-odd yuan trading hubs that now stretch from Singapore to London to Toronto.

"In the past, the offshore market could work by itself to reflect market opportunities, but now it’s a currency controlled by the PBOC," said Iris Pang, a senior economist for Greater China at Natixis SA in Hong Kong. "Progress is stepping backward."
CNH has been structurally weakened for a temporary short-term strengthening in the exchange rate.

Taiwan is looking ahead: Taiwan asks banks to set reserves for possible yuan derivatives default
Taiwan's Financial Supervisory Commission (FSC) will require banks to set aside reserves for possible default of a yuan derivative product amid sharp falls of the Chinese currency, three sources close to the regulator said on Monday.

The FSC also will ask investors to put down a 2 percent deposit for buying such products, which are called target redemption forwards (TRF), said the sources, who asked not to be identified as the matter is yet to be made public.

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