Very quietly, the PBOC has been fixing its middle exchange rate against the dollar higher and higher (in dollar terms). Today’s reference rate was 6.3895, up from 6.378 a week ago, with the CNY exchange coming close to 6.40 again for the first time since the disastrous period in late September. Unlike August, there has not been the flood of scolding “currency war” rhetoric, perhaps suggesting that there is now wider recognition that this world isn’t quite so simple. Not surprisingly, aside from geopolitics today, commodities have been nothing but sinking (copper futures almost traded below $2 yesterday) as have other “dollar” indications like gold and even Swiss francs (which continues to flirt with 1.02).
Against that backdrop, volatility in offshore CNH liquidity remains at best spotty. More likely the intermittent surges in CNH HIBOR are closer to troubling than just plain curiosity, thus circling the loop of “dollar” and PBOC actions. For its part, the PBOC remains committed to its SHIBOR peg as the overnight rate fluctuates in only the smallest increments.
In the wholesale context, the exchange rate of CNY is one element of the wholesale cost of “dollar” funding, thus it isn’t surprising to see a relationship between CNH liquidity (offshore RMB) and this “dollar” proxy. The reason for that is the PBOC itself, in a rather unique position as a global central bank. The financial requirements of maintaining a steady relationship with the dollar (and, historically speaking, “gaining” “dollar” volume by result) place great emphasis on this dynamic.
In the first place, the PBOC’s main balance sheet asset is “foreign assets” comprising all sorts of securities and accounts spread across the global banking system. The exact nature of these foreign “reserves” is unknown, but for these purposes that is a secondary consideration. For the most part, given the economic relationship of China’s trade needs and the euro/dollar system that finances them, the PBOC’s reserve “assets” on the balance sheet are essentially another wholesale proxy but this time in volume rather than price.
Because of central banking accounting, that established forex relationship provides the “thrust” in balance sheet expansion that comes out the liability side as internal currency and liquidity. The offshore CNH market is tangentially related as the PBOC allowed offshore trading in order to establish a deeper global market for the currency in absence of “reserve status.” But the banks offering CNH are those being affected by internal dynamics, and thus trade as another link between “dollar” and RMB.
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