The interbank lending rate in China shot up to 2.97% recently as the central bank tightened stimulus.
Local media there reported this was an attempt to ‘protect’ against speculation, but PBOC quickly fell in line.
“PBOC injected a net 78 billion yuan ($12.08 billion) into money markets,” Reuters reports today, potentially indicating that the system just can’t operate without money printing.
The Chinese yuan (CNY) has been gaining on the dollar with considerable speed since June 2020.
It is now at 2018 levels, just before their mass devaluation following Trump’s tariffs on Chinese goods.
Those tariffs are still there, with Biden seemingly having no plans to remove them, but due to the circumstances the CNY strengthening might have kept their earnings intact especially as consumers didn’t have much choice where it concerns pandemic related goods.
This relationship can perhaps be best seen on the Shanghai Composite Index (Shcomp).
Shanghai stocks dropped significantly during early 2020, but the Milan lockdown takes attention off China, and so Shcomp starts taking off, mooning in July.
For the next few months until December it keeps that new level, to then start rising in January.
Recently however the dollar has started strengthening, with the Shanghai stocks dropping by some 7% since January to then somewhat recover.
There are concerns China’s private economy is significantly leveraged, with consumer debt at $28 trillion, more than twice their GDP.
A sharp drop in their economy from 6% to 2% following a cool down in growth from some 10%, has some concerned this may open cracks.
That’s especially as dampened western demand may hit their economy hard following the wide rollout of vaccines with numbers there taking a turn in the west for the better.
The choice to vaccinate the elderly first has turned the peak, so normality is in sight by mid spring or summer.
That could pose problems for China as the yuan is perhaps too strong for normal times, with their export dependent economy potentially taking a hit as consumer confidence probably won’t instantly return.
Combined with the fact the dollar has fallen so much against the yuan, a devaluation is perhaps inevitable as the majority of Chinese citizens are still very poor by western standards, so a turn to a consumer economy probably wouldn’t be sufficient to cushion the fall in demand by western consumers.
This glitch in their banking system therefore is perhaps more a sign of a significant change, chiefly presumably that the dollar is strengthening and therefore their central bank has to effectively flood the market with liquidity to devalue the yuan.
Where cryptos are concerned such devaluation may well lead to an increase in bitcoin investment to escape a fall in the value of yuan, especially as billions are moved out of China through cryptocurrency.