Greed &Fear:The PBOC and the petard

Beijing.

After a few days spent in Beijing this week, it is clearer than ever to GREED & fear that thecentral issue in China has become the currency, not the stock market. There is no consensusfrom meetings held here about the reasons behind the surprise move on the currency on 11August. Still GREED & fear’s base case remains that it was at least partly motivated by thedesire to be seen to be moving towards a more market-driven system as regards the campaignto get into the SDR basket. This view is re-enforced both by the fact that the IMF made asupportive statement on the day of the announcement and also because it is what many peoplein China’s capital believe. As for the SDR basket itself, GREED & fear’s understanding remainsthat the decision will still be made in November but implementation has been delayed untilOctober 2016.

Still the reality is that events have now moved beyond the somewhat technical issue of the SDRsince the PBOC move on the currency has so clearly backfired, as discussed here last week (seeGREED & fear – Waking up in Jakarta, 27 August 2015). The renminbi is now under speculativeattack offshore as highlighted in the recent divergence in the rate between the onshore andoffshore renminbi (see Figure 1) and as also highlighted in market rumours, impossible forGREED & fear to substantiate, that the PBOC has been intervening offshore. In this respect astress test is now taking place on just how porous is China’s capital account.