Did CNY flash crash yesterday? That it is even being contemplated and argued is itself an indication of these times. According to pretty much all market data, CNY fell below 7.0 to the dollar just prior to the US open. It had been trading its usual (for the past week or so) artificial, non-volatile sideways at around 6.96 when for whatever reason “selling” hit, and then reversed.
That would be enough of a story all its own, given China and RMB’s place in the currency pecking order, but it went still further when the PBOC denied it ever happened. The Chinese central bank even put out an official statement that the level 7.0 was never breached, and that the overall range was far narrower (though still “selling”). According to Reuters:
China’s central bank on Wednesday rejected a media report that the yuan had weakened beyond the 7.0000 per dollar level in the onshore market on Dec. 28, calling the report “irresponsible”.
The yuan traded between 6.9500 and 6.9666 per dollar on Wednesday, the PBOC said on its microblog .
“But some irresponsible media reported that the onshore rate of the yuan broke the psychological threshold of 7.0000,” the central bank said.
Bloomberg, in particular, may be many things in terms of its commentary, but as far as data goes there really isn’t much more reliable available anywhere. And the flash crash in CNY wasn’t limited to just this one data source. About the only part that is perfectly clear in all this is that the PBOC just confirmed what I wrote yesterday (published earlier today) as being so far behind the monetary curve. Chinese central bankers are desperate, and in desperate fear of losing total control.
Small wonder, too, given that any broad survey of Chinese money finds two very clear propositions: they are a total mess that only increases; and behind all of it is the “dollar.”
All of which takes us back to the flash crash itself, demanding that we define our terms yet again. On its face, the fall in CNY is a sharp selling of RMB against the dollar. In reality, however, it is the other side that is more descriptive; if there is sharp selling of RMB, that is the same as heavy buying of USD. In more appropriate wholesale eurodollar terms, it is the “dollar” shortage becoming that much more acute so as to initiate what looks a lot like a margin call. That it took place all at once in a short amount of time isn’t impossible, or even implausible. It happened just a few months ago in another “reserve” currency, the British pound.
Regulation is a convenient and plausible (sounding) apology so as not to have to contradict established monetary principles no matter how many times they are disproved by action and empirical evidence. It’s not as if this has come out of nowhere, either. Brexit may have been some catalyst, but a flash crash in GBP is a big deal and once again speaks to the “dollar” shortage. As a reminder, there has been no shortage of indications about the treacherous state of global balance sheet capacity in recent weeks; starting once again with China’s connection to the eurodollar system and how that has affected its own RMB markets.
Flash crash means liquidity, which in this context means capacity, or lack of it. That decreased and shy capacity can act on all sorts of timescales (I’ll refrain from detouring into self-similarity and fractal behavior), from the long (the eurodollar withdrawal since 2011, or 2007) to, again, the shortest. The fact that the PBOC has issued a denial, in my view, only confirms that it actually happened given the state of Chinese monetary affairs of late.
China’s monetary officials are trying to implement a neutral monetary policy stance, which in these terms means a high degree of stability. Instead, we find only growing instability that all traces back to external (from the Chinese perspective) factors.
This is not regulations prudently pinching unbridled risk taking (still leaving unexplained the volatility in the first place), it is instead a growing “dollar” shortage whereby the global response to it has been ad hoc, unplanned, and carried out at best in uneven fashion.
The myth of the near-omniscient and all-powerful central bank took a massive hit in the past few years in a way that it should have in 2007 and 2008. Though the PBOC wasn’t unscathed in the mainstream view through it all, the Chinese central bank remains still the apex of the cohort, left closest to that ideal. Perhaps yesterday’s petulance will help in the real reform, which is quite simply redefining global money and global central banks to what they really are.