East Asian and Pacific rim currencies, with the exception of the yen, rallied strongly on the back of a colossal2.5% two day rebound by the China’s offshore yuan (left).
The offshore yuan has dropped more than the onshore yuan (right)
Oh, the oversold Philippine peso finally took a breather. The USD closed down .4% to Php 49.52.
Just a reminder, the Malaysian ringgit hit the 1998 Asian crisis level low on the third week of December and has remained only marginally away from the said low. Yes, another milestone!
Riled by the continuous decline of the yuan which has been exacerbated by reports that the onshore yuan experienced a flash crash at the close of December, the Chinese government opened 2017 with a string of fresh capital controls and financial interventions.
The Chinese government vehemently denied that a flash crash ever took place.
The Chinese government declared that it would work “to close loopholes” on the allowed conversion of yuan to other foreign currencies for citizens. It prescribed several conditions or extra requirements for such conversion including increased prohibitions, additional documentations, pledges and higher penalties.
Additionally, Chinese authorities reportedly ordered state owned banks to withhold funding in the interbank market in Hong Kong which caused a RECORD spike in the overnight offshore deposit rates to 105%!!! Yep, another landmark!
Moreover, many Chinese have used digital or cryptocurrency as a way to elude regulations and move money offshore. This caused bitcoin to hit a 3 year high early last week. See another record! In response, Chinese authorities have reportedly considered imposing restrictions on bitcoin transactions and this sent bitcoin prices tumbling 31% at the close of the week. Awesome volatility
All these measures have apparently been engineered to contain capital flight and “burn yuan bears”.
Meanwhile, the Chinese government reported that its foreign currency holdings remained a tad above $3 trillion ($3.01) based on government support. Some have questioned the integrity of such numbers.
Amidst the chaos, the PBoC reportedly injected money last week which helped mildly eased on some domestic money market rates.
I have repeatedly noted here that the China seems to have been caught in a deep conundrum. Signs of liquidity crunch on both SHIBOR and HIBOR rates have been in place for quite some time. Moreover, I’ve pointed out that the Chinese government has been time and again attempting to supposedly burn or quash yuan shorts only to see the yuan weaken.
On the other hand, little has been given thought to the idea of the other potential factors that may have influenced the USD yuan’s actions. Or what may have been plaguing China’s yuan, which actually signifies a symptom, has been balance sheet constrains particularly on US dollar debt exposures.
Furthermore, China policymakers appear to be lost.
In an effort to stave off a downturn in 2016, the Chinese authorities opened the floodgates of credit (more than US $2 trillion), as well as, used fiscal stimulus to pump prime their GDP.
The response from these has been a transitional shift in bubbles to bonds, real estate and commodities. Chinese citizens reportedly traded commodity futures in a record US $25.5 trillion volume. Yes record again!
The fact that the Chinese has issued enormous of credit implies of a weak yuan. However, almost everything is being blamed on capital flight. Yet soaring price instability, as consequence to massive credit expansion, has only prompted the Chinese authorities to put curb on real estate prices. In the meantime, regulators are pondering on tighter regulations on the shadow banking system.
Along with yuan support, which effectively means tightening, curbs on the real estate and regulations on the shadow banking system points to even MORE tightening.
In short, Chinese authorities could be reversing the policies which they put in place in 2016.
Therefore strains from previous economic slowdown will now likely be aggravated by a coming downturn—if the Chinese government lives up to its word to tighten.
Yet until those financial skeletons come out of the closet, the yuan is likely to further attenuate.
Well, the vulnerability of China’s highly leveraged economy seems to be surfacing.
China should be a big risk factor for 2017. Those record upon record has served as writing on the wall.
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