ChinaBOR

In 1927, physicist Werner Heisenberg wrote in his paper defining the “uncertainty principle” that, “the more precisely the position is determined, the less precisely momentum is known in this instant, and vice versa.” It has also been called the “principle of indeterminacy” which simply means that you can only pick one variable. By doing so, you lose any chance for accuracy about the other.

So it is in central bank money markets, a long established proposition that predates the latest “proofs” on display once again in China. It had always been the case that a central bank could pick quantity or price, but not both. The Chinese experience in the “rising dollar” period is bit more refined than that, however, a position that you can be sure they do not relish. Furthermore, it seems as if there has is another dimension to this behavior whereby only Japan or China can be at less issue at any one time; not both.

As I wrote on Friday (subscription required):

After having ceded so much attention to Japan and JPY over the summer, it does appear as I indicated last Friday that China is having enormous trouble with CNY, threatening to take back the central pivot in “dollar” indications from the Japanese.

Clearly they don’t want it but have no say in the matter (which is the only thing that has truly mattered this whole time). There are only two possibilities now that HIBOR has been drawn in where SHIBOR has finally gone: that the PBOC is, as the mainstream suggests, attempting to stamp out speculators betting on further devaluation, or by paying so much more attention to CNY since mid-August that offshore RMB liquidity has on its own become as seemingly impaired as onshore.

The idea of HIBOR (offshore RMB, not Hong Kong dollars) being a central bank tool dates back to January when for two days the unsecured lending rates were pushed beyond all proportional sense; the O/N rate spiked to 66.8% on January 12. Occurring amidst the very center of the global liquidations of the time, there was actually some sense to it as a matter of possible policy effort. Floundering in CNY “devaluation” was the most crucial indication of everything wrong at the time. As the indicated central bank, the PBOC had every interest in doing whatever it could to arrest the currency decline that people still think of as export stimulus.