War On Short Selling; The Last Hope

If the PBOC was desperate last week, the catalog of words describing their likely stance this week is unbelievably short (pun intended). In the handbook of central bank operations, when conditions truly spiral out of control the first entry in that chapter says to blame speculators. Primary among them, subchapter one in the handbook, are the short sellers. If you think back to 2008, even the supposedly steady and omniscient Federal Reserve encouraged the SEC to ban short selling on bank stocks (first naked that July; then outright on September 19). As if it needs to be pointed out, it doesn’t work.

What short selling bans amount to are acts of proclaimed exhaustion; the central bank or central financial authority has no other options left and short sellers make a good and public target. Increasingly, it seems the PBOC in calling for increased “flexibility” (read: despair) the past few weeks (subscription required) has more and more focused on those speculators supposedly short selling yuan. Because of China’s dual market for currency, CNY and CNH (offshore), any distance between them supposedly opens arbitrage opportunities which can only further destabilize an already precarious position. Thus, by targeting speculation of that kind the PBOC claims to be working back toward good order.

So the behavior of the “dollar” is much like a short squeeze, and now the PBOC has used its state run banks to enact a short squeeze in yuan – fighting a short squeeze with a short squeeze. How could it possibly fail?

The arb between onshore and offshore RMB has the effect of moving “dollar” transactions to Hong Kong and away from onshore China; a “speculator” might “buy” CNH in Hong Kong and then “sell” in CNY in Shanghai, all using “dollars” as the funding mechanism. It displaces dollar activity and volume that is obviously needed and necessary onshore where the PBOC clearly believes it has legitimate interests. In other words, this is not the center of China’s “dollar” problem so much as it makes it that much more difficult and unsteady.