Chinese Checkers: Rumors, Yuan Intervention Help Shanghai Stocks Close The Week With Furious Rally

On Friday, just hours after clips from Donald Trump’s interview with CNBC’s Joe Kernen betrayed the extent to which the President is “not happy” with the fact that the policy divergence between the Fed and the PBoC is causing the Chinese currency to “drop like a rock”, China weakened the yuan fixing by the most in two years.

That clearly indicated the PBoC is more than willing to let the market push the currency lower in the near-term as a weaker currency helps cushion China’s economy from the trade frictions. At a certain point, authorities in Beijing will have to worry about capital flight, but apparently, they believe measures put in place following the 2015 devaluation are sufficient to prevent a mass exodus and so, they’re prepared to let the currency weaken further.

The fixing news was not great for risk appetite, but overnight, things turned around with traders flagging a policy bank selling dollars.”The big bank offered the dollar at 6.81, and stopped selling  after the yuan trimmed its loss to trade near 6.79″, two traders told Bloomberg, adding that “the bank’s selling activity spurred profit-taking among other lenders, magnifying the impact.”

Here’s a look at how things have played out for the offshore yuan since Thursday afternoon:

Meanwhile, Chinese equities reversed course to close sharply higher amid reports that mutual funds will be allowed to by “non-standard” products, which I guess means AMPs and other spawn of the country’s labyrinthine shadow banking system.

“Liquidity on the mainland will be boosted if mutual funds are able to buy non-standard products and banks don’t need to rush to clean up their off-balance-sheet assets,” one Dai Ming, of Hengsheng Asset Management told Bloomberg.

Apparently, the initial report was later pulled from the website of the 21st Century Business Herald. Subsequent reports indicated that authorities are drawing up rules for banks’ WMP businesses in conjunction with the broader effort to regulate China’s AMP industry. Those guidelines will be released soon.

Who knows. What we do know is that by the time it was all said and done, the Shanghai Composite was up more than 2% following the late rally sparked by the initial rumor that mutual funds may be able to help boost liquidity by purchasing risk assets.

Never a dull moment for the greatest show on Earth: China’s impossible juggling act that effectively involves deleveraging and releveraging at the same time while devaluing the currency without sparking capital flight and fighting a trade war with an unhinged real estate agent in orange clown makeup.