Deutsche Bank, RMB

The Chinese stock market opened for the first day after the Chinese New Year holidays with a mild 0.6% fall, far less than what the rest of the world lost during the past weeks.

The RMB soared from 6.585/USD to 6.491/USD, the largest single-day appreciation in more than 10 years! That should send chills down the spines of those trying to short the RMB currency.

Shorting the RMB is a reckless ride down the edge of a razor. Firstly, only RMB offshore is a foreign exchange currency, or FX (meaning it can be freely converted into other foreign currencies). That volume is miniscule compared to the total RMB supply inside China’s border. RMB in China is not FX, i.e., it is not freely exchangeable into other foreign currencies. You can only convert RMB into foreign money and take it out of China if the transaction and the amount qualify under Chinese administrative regulations. So you do not want to short the RMB in China because you will have a difficult time taking the money you make out.

Second, the current volume of offshore RMB is insufficient to provide liquidity for speculative financial transactions (the depths of cash market and funding market are not developed enough to facilitate sudden huge volumes of settlement). So what does that mean? It means simply that the Chinese state-owned arms become the source of supply or demand of offshore RMB/FX in those instances, when the market becomes lop-sided. The Chinese government is like the cashier/cage at a casino, where only its chips are real money.

Just imagine what would happen when you want to short the RMB? You sell, he buys. You buy, he sells. You want the exchange rate to go up? At some point, he might want it to go down. You want to drive it down? At some point, he might want it to go up. He is supply. He is demand. Hey, you are not the only customer. Sorry.

No country wants a strong currency at the moment. China would not want the RMB to go up necessarily. But it does not want the George Soros out there to manipulate it either. China wants them to know who is boss, and who is not.


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