Yuan mission accomplished for the PBOC?

Advertisement

From Bloomie:

China is succeeding in making its currency less predictable. Investors are paying the price.

Clients of U.S. commercial banks have lost about $2 billion this year on $332 billion of options betting the yuan would appreciate, while Chinese companies lost $3.5 billion on $150 billion wagered on a benchmark forwards contract, according to data compiled by Morgan Stanley and the Depository Trust & Clearing Corp. inWashington. These contracts, when including bearish bets, account for more than a third of global trading in the Chinese currency.

After almost a decade of gains, speculators had come to regard the yuan as a one-way trade, leading to a surge in capital inflowsthat stands to leave the country vulnerable to a sudden shift in investor sentiment. Policy makers responded by selling the yuan and widening its trading band, encouraging a record 2.4 percent quarterly decline that was the biggest among Asian currencies.

“The depreciation was engineered to burn the fingers of speculators,” said David Loevinger, a former senior coordinator for China affairs at the U.S. Treasury and now a Los Angeles-based analyst at TCW Group Inc., which oversees $132 billion. “The People’s Bank of China wants two-way volatility embedded in the market.”

The PBOC has fixed its rate at marginally higher levels over the past few days, including today with a reference rate at 6.1493 (vs. prior set at 6.1503) but the currency continues to trade at the upper end of the band suggesting ongoing capital withdrawal:

png
Advertisement

Looks like mission accomplished for now which, all things equal, should mean slower credit, which is in evidence in tightened interbank markets:

shibor
About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.