2016-05-20

Countdown to Next Round of Yuan Depreciation

Reuters: China commercial banks sell net $23.7 bln of forex in April
China's commercial banks sold a net $23.7 billion of foreign exchange in April, compared with a net sale of $36.4 billion in March, the foreign exchange regulator said on Monday.

For the January to April period, net forex sales stood at $148.5 billion, the State Administration of Foreign Exchange said in a statement on its website.

Alhambra: It’s Important To Keep In Mind We May Never Know Why
At this moment, we have CNY acting predictably and now the PBOC updates its own behavior in the same fashion. The most important piece of the latest balance sheet figures for April is that once again bank reserves in China declined just as we suspected it would related to the “ticking clock.” Further, the proximate cause of the drop was a sharp increase in government deposits; that isn’t the problem for Chinese liquidity, however, as it indicates instead the general illiquidity everywhere else that the PBOC did not expand its balance sheet elsewhere to accommodate the central government.

Not for lack of any effort, though, as there was a RMB 320 billion increase in the medium term liquidity programs (claims on other depository corporations). However, just like last March when the whole internal system of bank reserves suddenly turned around to where reserves would suddenly decline regularly, there is no indication as to why the PBOC didn’t expend more effort to head off harmful liability side redistribution. It is that part that worries me the most, as it suggests that though we might have found some assumed degree of predictability and comfort with understanding there is “something” else missing – perhaps very big and important.

...The history of the PBOC balance sheet over the past year does seem to suggest just that kind of intent. There has been this seemingly determined restraint to just follow the forex assets at the base of the asset side no matter what it does to the liability side (internal money). And if that is correct, then it can only mean that Chinese officials are deathly afraid of the alternative. Their focus, as the “ticking clock”, would then be on the short run alone; to manage any disruption as its own problem rather than seeking full monetary absolution on the same terms as had been done up to 2012 (flooding).

The implications are enormous, not the least of which is a more realistic picture for the global and US economy. The Chinese government, again if this is correct, is actively betting against Janet Yellen’s economic outlook. You don’t go into this kind of “emergency” mode if six months from now the world is a bright and beautiful place again. It might also propose that in light of that stance the PBOC could in one of these “dollar waves” go do too much on the short run so that the “ticking clock” following it becomes utterly unmanageable from any effort. The pendulum swings too far.

There are, of course, many other possibilities that could, in theory, account for what we find in China and Chinese money. That is again the problem that bothers me the most even here where it seems as if correlations have been durably established to the point of actual predictability (including why 2% O/N SHIBOR is so damn important; there is no obvious reason, none, as to why that number is meaningful but it clearly is and has been to the PBOC that it acts as a very useful guide; not knowing the actual reasoning behind it leaves us vulnerable to when it might not be).
Reuters: Foreign banks to start China yuan trade settlement on Friday
The first batch of foreign commercial banks has registered to directly trade yuan used for overseas trade settlement and can begin doing so on Friday, the foreign exchange market operator said.

Approved foreign commercial banks include CTBC Bank, Taipei Fubon Bank, Standard Chartered and Citibank Hong Kong Ltd.
Bloomberg: Yuan Heads for Longest Weekly Losing Streak This Year on Fed
China started to allow six offshore banks to trade spot, swaps and options in the onshore interbank currency market from Friday. This will help narrow the gap between onshore and offshore prices, according to Oversea-Chinese Banking Corp.
And if the offshore yuan leads the way lower?

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