Home » Posts tagged 'Short-Term Gains'
Tag Archives: Short-Term Gains
A Desperate China Begged Fed For “Plunge Protection Playbook” As Its Market Crashed
A Desperate China Begged Fed For “Plunge Protection Playbook” As Its Market Crashed
The SHCOMP’s inexorable, parabolic ascent was to a large degree facilitated by an explosion of margin debt, the likes of which could not be found in any other major market across the globe. For instance, by the end of June, the outstanding balance of margin transactions as a percentage of the SHCOMP’s free float market cap was nearly 14% compared to just 5.5% for the S&P and less than 1% for the TOPIX.
A dramatic unwind in the half dozen backdoor margin lending channels that had funneled an additional CNY1.5 trillion into equities brought the party to a thunderous end and by late July, the market was off by more than 30% from its peak.
Chinese officials had already begun to panic by mid-month and then, on the 27th, the bottom fell out.
A harrowing bout of late day selling led the SHCOMP to post its worst one-day drop since February of 2007 and its second worst single session decline in history as the market collapsed by 8.5%.
More than two-thirds of stocks in the index traded limit down that day.
At that point, China was out of ideas. It had been nearly three weeks since Beijing announced it would inject capital into China Securities Finance Corp., effectively giving the PBoC a mandate to not only underwrite brokers’ margin lending businesses but in fact to buy A-shares directly, and nothing seemed to be working to arrest the slide.
Indeed, starting on June 27 (by which time the Shenzhen had fallen by more than 20% from its peak) the PBoC unleashed an eye watering array of measures that encompassed everything from an RRR cut to the easing of regulations to state mandated investments by pension funds to verbal interventions in the form of threats against “malicious” shorts. Nothing was working.
…click on the above link to read the rest of the article…
China Takes “10 Steps Back,” Slaps 20% Reserve Requirement On Currency Forwards
China Takes “10 Steps Back,” Slaps 20% Reserve Requirement On Currency Forwards
Overnight, China decided to take steps to reduce “macro financial risks.”
And by that they mean “do something quick to help ease pressure on the yuan” and by extension, on the PBoC’s rapidly depleting FX reserves.
To that end, starting October 15 banks will have to hold the equivalent of 20% of clients’ FX forward positions with the PBoC, where the money will sit, frozen, for a year, at 0% interest.
Obviously, that will drive up the cost of taking speculative positions which the PBoC hopes will help narrow the gap between onshore and offshore yuan and bring down volatility, although the degree to which this will help fill the CNY-CNH spread looks like an open question.
“It’s a move to ease the reduction in foreign-exchange reserves,” Tommy Ong, managing director for treasury and markets at DBS Bank Hong Kong, tells Bloomberg. “It will also remove lots of speculative trades that aim at short-term gains as the reserves have a minimum lock-up period of one year,” adds Stan Chart’s Becky Liu.
Here’s a bit of color from FX strategy desks via Bloomberg:
- Andy Ji, Singapore-based currency strategist at CBA:
- This is typical FX control, as it limits the FX forward positions
- PBOC has intervened before in the forward market, but imposing the 20% limit on outstanding forward position will require less intervention effort
- Spread on CNY and CNH may not substantially narrow on this move alone, as global demand on dollar remains high and China economic grow remains slow
- Fiona Lim, Singapore-based senior FX analyst at Maybank:
- This seems to be another move to discourage yuan forward selling and to lower yuan depreciation expectations
- Offshore-onshore yuan gap has been pretty persistent because of yuan depreciation expectations and officials want to narrow the gap
- Gap will be sustained as the economy continues to remain under pressure
…click on the above link to read the rest of the article…
