With China Facing Currency, Liquidity Crises, Ex-PBOC Official Urges Use Of “Nuclear Option”

Wednesday, December 28, 2016
By Paul Martin

by Tyler Durden
ZeroHedge.com
Dec 28, 2016

With the PBOC fighting tooth and nail to slow outbound capital flight, which according to Goldman has reached $1.1 trillion since August 2015, and which these days mostly means keeping the Yuan from depreciating to new all time lows below 7 Yuan to the Dollar, the Chinese central bank may have its work cut out for it in the immediate future. The reason is that, as Bloomberg reminds us, the first day of 2017 is when an annual $50,000 quota to convert the yuan into foreign exchange resets, stoking concern there will be a rush to sell the local currency.

With tax payments and a regulatory assessment also tightening liquidity in the money market toward year-end, manifesting itself in soaring unsecured funding rates such as the overnight repo hitting 33% as noted yesterday, paralyzing both the overnight…

… January may bring scant relief as lenders prepare for stronger cash demand before Lunar New Year holidays, which are only a month away.

The narrative is familiar: China’s markets are seeing renewed pressure this month as the Federal Reserve projects a faster pace of rate increases for 2017 and its Chinese counterpart tightens monetary conditions to spur deleveraging and defend the exchange rate. The declines are capping off a tough year for investors during which bonds, shares and currency all slumped, with the last hitting all time lows, just as Kyle Bass had predicted roughly one year ago.

Much of the blame is on the unique calendar this year: “You have Chinese New Year quite early, and because of that one-month window, most of the banks will try to lock the money in a three-month cycle,” said Arthur Lau, Hong Kong-based head of Asia ex-Japan fixed income at PineBridge Investments. “The current situation in the bond market is partly because of year-end and because of Chinese New Year.”

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