So last week, we suggested that people might be thinking far too hard about stronger yuan fixings and the PBoC’s move to introduce what China is euphemistically calling a “counter cyclical adjustment factor†to the fixing mechanism.
The spot had begun to deviate materially and habitually from the fixings and analysts’ models were routinely predicting weaker fixes than what ultimately emanated from the PBoC. Plus, policy banks were selling dollars in the onshore market. Clearly, Beijing was getting concerned about capital flight. Here’s what we said:
Yes, “this is a pattern.†Or, put differently, this is the PBoC scrapping or at least temporarily sidelining the market’s role in determining how the onshore yuan trades. The last thing you want if you’re already destabilizing everything from the bond market to the stock market to commodities by squeezing your elephantine shadow banking complex, is for the currency to go into free fall again because then you’d have to add “accelerating capital flight†to the list of fires you’re trying to fight.
Well needless to say, the Moody’s downgrade didn’t help. So what did China do? They simply codified what they were doing anyway. They went public with the “counter cyclical adjustment†factor they were already applying.
The thing to remember (or maybe “renmember†is better) here is that a weaker currency could help the export-driven economy, but at this juncture, discouraging capital flight seems to be the overriding concern. As noted in the excerpted passage above, “the last thing you want if you’re already destabilizing everything from the bond market to the stock market to commodities by squeezing your elephantine shadow banking complex, is for the currency to go into free fall again because then you’d have to add “accelerating capital flight†to the list of fires you’re trying to fight.â€
