The yuan rout is deepening.
On Thursday, the offshore yuan weakened past 6.80 for the first time since July of last year, as the easing bias inherent in recent pronouncements from officials and other reports portends a widening policy divergence with the Fed, further undercutting the bull case and tipping a growing sense of consternation in Beijing about the prospect of trade frictions hitting the domestic economy.
Here’s a chart with notable policy actions/turns annotated for reference:
You’ll note that over there on the right side, 6.85-6.90 is flagged as a possible zone for intervention. That’s around levels where the PBoC adopted the counter-cyclical adjustment factor last summer on the way to engineering a historic rally in the currency against the dollar. It’s possible they could resort to leaning on the CCAF again to stanch the bleeding.
“We expect the next key resistance at 6.85, the level at which PBoC introduced the countercyclical factor back in May 2017”, BNP wrote last month.
Three weeks ago, PBoC governor Yi Gang verbally intervened when the yuan fell through 6.70 and on Thursday, the central bank weakened the fixing beyond that level, suggesting those who believed there was something special about that purported “line in the sand” were wrong.
On Wednesday, reports suggested the PBoC is all set to incentivize commercial banks to increase lending and investment in corporate bonds.
“The central bank has been making sure that lenders have ample liquidity by taking various measures, such as using its medium term loan facility, to support banks, especially those that have invested in bonds rated AA+ and below”, Reuters wrote. So basically, they are actively encouraging banks to buy high yield bonds.
That’s on the heels of the latest credit data out of China which showed that the deleveraging push is beginning to bite – hard. M2 grew just 8% YoY in June, the slowest pace in more than two decades and while the amount of new yuan loans continues to suggest authorities are having some measure of success in keeping credit flowing to the real economy, the effort to squeeze leverage out the shadow banking complex always risks inadvertently choking off that flow.
“That credit growth slows more than expected or desired when regulators try to rein in periods of financial innovation and regulatory arbitrage has become an axiom of banking [and] China’s June credit data show that it is the latest example”, Credit Suisse wrote in a note out last week, adding that “the collapse in non-bank and off-balance-sheet lending remains the key problem [as] these contracted 0.6% YoY in June, the first in recent history.”
There’s more on this here, including a bit on the monthly decline in entrusted loans.
The bottom line, as Credit Suisse wrote in the same note cited above, is that “the contraction in non-bank, off balance sheet lending is overwhelming the modest improvement in bank lending”, hence the need for more easing measures.
Also on Wednesday, China’s Banking and Insurance Regulatory Commission instructed financial institutions to help reduce financing costs for small- and micro-sized companies, imploring large and medium-size banks to set an example by increasing loans in order to facilitate lower borrowing costs.
All of this is serving to undercut the currency as it certainly seems to suggest that policy makers believe they have enough measures in place to prevent capital flight in the event the currency continues to weaken. They are, simply put, tolerating the weakness and seemingly viewing it as a somewhat welcome development to the extent it can offset some of the pressure on the economy from the worsening trade conflict with the U.S.
Here’s what Royal Bank of Canada’s Sue Trinh told Bloomberg on Thursday:
China is actually giving the green light to send the yuan weaker. We’ve had no verbal intervention, lame efforts to slow the RMB’s descent and announcement upon announcement of monetary and fiscal easing.
I would remind you that in the case of the yuan, not acting is tantamount to acting. That is, because it’s managed, a hands-off approach can’t really be described as “hands-off” – not acting is in fact a policy decision. Needless to say, Chinese authorities also know that easing measures will increase the policy divergence between the PBoC and the Fed, putting pressure on the currency.
Of course there’s a lot of nuance there and Beijing appears to be betting that they can lean on that nuance (i.e., point to “market forces”) if they’re accused of weaponizing the currency.