It seems as though Beijing has been attempting to influence the course of yuans in their forex market over the last period. The Chinese currency has been falling over the course of the last few weeks, and the government is finally trying to stem the tide. However, this seems to have had consequences they did not intend for. It resulted in traders searching for short-term funds in a rather volatile fashion.
Currently, the yuan to dollar rate is at $0.14.
It is not unusual for traders to need cash when it comes to the Chinese banking system, especially towards the end of each month. However, we saw quite a different case on October 31st. Short-term funding reached 50% in rates. The reason for the event seems to be quite complex, although the meddling of the government does seem to be a primary contributor. Various factors drove investors into a fearful mood and sent them scrambling for funds.
China’s central bank, the PBOC, and the CFETS intervened shortly after the incident. They guided lenders and did what they could to calm down markets. This included the extension of trading hours and having meetings with key institutional players.
There were several other problems leading to the change. Many traders had been hoarding cash while waiting for the government to make a substantial bond sale. There was also the factor of banks not lending due to the government’s plans to put upward pressure on yuans. This then resulted in lending rates rising. All of this created an environment with a distinct lack of liquidity when the last month ended.
The CFETS and PBOC noticed unusual trades on the 31st of October, which they are now investigating. Some showed individuals borrowing/lending money at incredibly high interest rates.
It seems that these vulnerable points may be exposed for quite a while. While capital continues to flow out of the country, this will likely remain a problem. Traders will likely hope the PBOC acts to correct the course of the yuan coin soon.
