A Plea For Answers First

 | Jan 10, 2017 01:45AM ET

For all the fuss about speculators in Hong Kong, China’s central bank doesn’t seem very capable of handling them. Last week the offshore RMB money rate was driven once more to ridiculous proportions, with conventional “wisdom” attributing it to intentional PBOC policy. That seemed to be the case on Thursday, where the overnight HIBOR rate (CNH) was 38.335%, but not Friday when the same rate registered 61.333%. At 38.335%, the currency exchange rose sharply as would be expected with “speculators” under attack. CNY, however, fell very sharply on Friday though liquidity was even more atrocious (meaning “speculators” supposedly unable to borrow short RMB, though short RMB was what happened).

The exchange rate dropped considerably again today, making the past two trading sessions the worst for China’s currency since August 2015. One might argue that overall the CNY exchange has at least stayed above 7, debated flash crash aside, but if the PBOC’s resolve is for sideways doing it in such volatile fashion is unhelpful and in the long run even more destabilizing. A currency within the throes of so many wild gyrations is indicative of all the wrong attributes.

That is because the links between “dollars” and internal RMB, whether onshore or offshore, are poorly understood and more often totally ignored or uncomprehended. If you start with the premise that the Fed’s balance sheet expansion is the relevant setting for dollars, then the PBOC’s actions are just that confusing and mysterious; maybe even nefarious and “unfair.” If, however, you are properly observant of “dollars” unrelated to QE’s in the US or anywhere else, then China’s palpable desperation and clear lack of control actually makes perfect sense. The currency as well as RMB liquidity seems to be related to factors outside of China, which is actually the case.

Despite ridiculous offshore rates, money rates in China were far calmer at the end of last month than in the middle. In mid-December, in what was, unsurprisingly, attributed to the FOMC vote, everything from repo to SHIBOR was in a state of liquidity shock. The PBOC responded as it has over the past few months, injecting enormous quantities of funds largely through its “alternate” tools such as the MLF. In December alone, the PBOC added RMB 721.5 billion in additional liquidity, following RMB 624 billion in November.