Submitted by Jeffrey Snider – Alhambra Investment Partners
It wouldn’t be “reform” if it wasn’t seemingly contradictory and confusing. It is increasingly apparent that investors and observers look at everything in binary terms; something either isn’t or it is. In China, the entire premise of what they are doing takes more than one form, as it can look to be conflicting in the sense that the PBOC both “tightens” and “loosens” at the same time. That is the nature of trying to wean off monetarism’s asset bubble byproducts of great inefficiency.
Yesterday, the PBOC raised its yuan reference “fix” to 6.1318, a significant difference to offshore trading rates that have seen the currency depreciate as much as the first wave of “reform” in early 2014. It was an effort aimed at liquidity financing speculation, assuming that the net effect is to cause “outflows.”
I wondered earlier in the week if the PBOC had finally met its limitation, and the answer appears to be a qualified more of the same. In what is like a liquidity twist, the “tightening” aspect of raising the official currency reference is then undone, somewhat, as there is no precision here, by the nearly simultaneous reaction of reducing the RRR by 50 bps. However, the PBOC made further liquidity steps aimed at particular institutions, like the Ag Bank, those already deemed “good” and “necessary” by the PSL conduits last year. Continue reading
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