FXstreet

It’s possible that China is not ready for free markets. The first sign was in the first half of 2015 when regulators let Chinese stocks soar, fueled by hugely speculative investments and a surge in margin trading. Then, after the bubble popped, policymakers cobbled together a haphazard rescue package that ultimately failed to support the market. The currency “devaluation” was an attempt to appease the IMF and also jumpstart the country’s stagnant manufacturing industry. But allowing CNY to drop a mere 3% before resuming intervention will not spark economic activity.

Most alarming was the PBoC’s inability to lower money market rates last week while the local stock market dropped 10% in one session. Last Tuesday, the PBoC injected 150bn CNY into the banking system through reverse repos. On the same day, 120bn CNY worth of repos matured – making the net injection 30bn CNY. It’s often overlooked, but the PBoC doesn’t actually intervene in FX markets. Instead, it instructs state-backed banks to intervene on its behalf. The same day, Chinese banks sold ~$15bn USD/CNY to protect the exchange rate. However, that soaked up another 96bn CNY ($15bn*6.4) of capital from the system. At the end of the day, the PBoC actually tightened liquidity by 66bn CNY.

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