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USD-CNY to be range-traded in near term

PBoC set USD-CNY fixing at 6.3893 this morning, compared with previous closing rate of 6.3885. USD-CNY trended downward this morning following unwinding activities in USD long positions in both onshore and offshore markets, as China's Premier Li Keqiang reiterated over the weekend that there is no basis for continued depreciation of CNY. 

In the meantime, Premier Li also emphasized the importance of financial stability, indicating that China's central bank could continue to intervene into the market to stabilize the CNY exchange rate. 

"At the same time, China's central bank will continue to add liquidity into the system as intensive interventions drain a large amount of CNY liquidity from the market. In the near term, USD-CNY spot rate is seen to be range traded between 6.38 and 6.40", says Commerzbank. 

Clearly the Chinese regime is trying to calm markets rather than generate further excessive volatility. Too much volatility would be a bad idea, as its main concern should be to prevent too much capital leaving the country. The quicker capital flows out the larger the risk that following the stock market other domestic capital bubbles might burst. Systemic risks are typically caused by the property market - as property crises quickly affect the financial system of a country, which will have to be prevented. 

However, according to Commerzbank, the medium to long term outlook for China is a completely different set of news. Publicly the regime seems to try and make single journalists and traders responsible for the crash on the stock markets. As ridiculous as that may seem to Western readers, two things are worth remembering: 
 

  • That is no too much different in the West. After every crash the public (if not the government) finds someone to blame. The pattern is almost the same and has been sufficiently described. Even those who had bet on ever rising tulip prices in the Netherlands of the 16th century blamed others for their losses after the bubble had burst.
     
  • In all political systems this approach prevents a sensible investigation of the causes and consequences of a crash. This is not a recipe for ensuring long term stability - on the contrary.  

 

 

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