Beijing Eases Policy, Yuan Slides Towards 10-Year Low

On Sunday, the Bank of China cut the level of cash that banks must hold as reserves. The Yuan continued its slide.

Shares in Asia stumbled in early trade on Monday as investors waited with bated breath as China’s markets prepare to reopen following a week-long holiday and after its central bank cut banks’ reserve requirements in a bid to support growth.

Investors will be focused on markets in China, following a decision on Sunday by the People’s Bank of China (PBOC) to cut the level of cash that banks must hold as reserves in a bid to lower financing costs and spur growth amid concerns over the economic drag from an escalating trade dispute with the United States.

Reserve requirement ratios (RRRs) - currently 15.5 percent for large commercial lenders and 13.5 percent for smaller banks - would be cut by 100 basis points effective Oct. 15, the PBOC said, matching a similar-sized move in April.

Trade War

China said it would not devalue the yuan in response to a trade war. Actions speak louder that words.

The CNH is once again dangerously close to the PBOC's redline of 7.00, with 3-month USD/CNH points, which have reached their highest this year, suggesting that a breach of that level is increasingly probably and implying a CNH yield of around 2% above equivalent USD 3-month rates. At the same time, the 1-year forward is also flirting with 1,000 pips, another signal that traders see a weaker yuan. The rate of appreciation in the forward curve this month is the quickest since June, when the U.S.-China trade war crossed the Rubicon.

As a reminder, the further the yuan drops the greater the offset to US import tariffs, and the more likely that the Trump administration will impose even greater sanctions in the future as it sees Chinese monetary policy as specifically targeted to undermine the impact of Trump's trade war including manipulating its currency.

Brad Setser on China Reserves

What's Next?

No Red Lines

Whatever red lines there were, vanished in the trade war.

Mike "Mish" Shedlock

Comments
No. 1-6
Pater_Tenebrarum
Pater_Tenebrarum

There is a direct connection between minimum reserve requirements and foreign exchange holdings in China. They are two sides of the same coin, so to speak. Lowering minimum reserves is a strong hint that forex reserves are declining.

JL1
JL1

On a further thought it is likely Chinese banks were becoming capital constrained which would have cut lending and dropped growth and crashed economy. So chinese dropped banks cash reserve requirements to keep new lending flowing.

How many chinese banks are mal-investment zombies?

When will the debt and malinvestment bubble in China pop?

JL1
JL1

This shows the tariffs are hitting the chinese economy hard and they want the yuan to drop to compensate for the tariffs and make their exports competitive even with the tariffs. Trump should have tied the tariffs to the dollar-yuan Exchange rate so that if yuan drops 10% vs dollar from the date the tariffs were announced then the tariffs automatically increase 10%.

NewYorkNy
NewYorkNy

China negotiations likely require shipping physical gold to them at $1,150. Supply and demand don't matter. The USDX is an index that will raise with China's devaluation. The USD purchasing power will continue to fall. Real time paper trading only looks at a few miliseconds ahead. It i possible with Silver paper contracts to reach a negative number, just like bonds. If the CFTC enforced the rules, that would be impossible. With no rules, we may witness the reality of un-limited paper promise.

NewYorkNy
NewYorkNy

Spoof will send physical gold, silver to China. As the currency falls, the HFT of paper contracts on early China opening October 8, 2018 will flash-crash silver and gold. China can use it's newly printed (created) money to take possession of many metals.

The NYMEX on its open will assist China in the paper short selloff. Silver at $14.70 may test $13.90 in 36 hours. Precious metals should remain contained well below the 50 day Moving Average until lose to or just after the November Election. The idea of discussing inflation in the election would be dangerous to too-big-to-fail banks. Confirmation of the intent to contain metals, esp Silver, was made on Bloomberg TV last Friday in an unscheduled appearance. The NY Fed President announced that "inflation will only risle 0.1% over the next couple of years". Regardless of the math, this is a mandate of "the truth". Whatever it takes to keep inflation indicators contained might have been the message. For manufacturing, Silver, Aluminum, Zinc and Lead should be expected to be contained on the paper traded markets.

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