The Historical Monetary Chinese Checklist You Didn’t Know You Needed For Christmas (or the Chinese New Year)

And the timing is equally as festive; holidays in America and Europe soon to be followed by a big one in China.

To begin, the real big stuff; as we know, another RRR cut came in close succession to the eurodollar futures inversion at the beginning of December.

Total bank reserves fell on a year-over-year basis last month, thus the desire from authorities for China’s banking system to be able to “unlock” more of their bank reserves given overall bank reserves (set by monetary policy) are on the decline once more. Compared to November 2020, total reserves were 2.2% less in November 2021.

Thus, by word and now deed, the Chinese Communists are unequivocally showing you what they think about lower growth prospects; they are, in fact, taking away even more official support as uncertainty and outright problems grow larger, meaning that officials are clearly intent on China’s economy going forward without the same level of real estate and property boost as had been gained since 2009’s grand Keynesian introduction.

The level of central bank balance sheet space for bank reserves and currency issued (which continues to grow at a slow pace; above) is carved out mostly by foreign assets but also through monetary policy programs such as the PBOC’s MLF facility (below).

Like bank reserves on the money side, the same policy intent is spelled out here in the assets: Claims on Depository Corporations also declined (year-over-year) in November.

To the Evergrandes of China, the government has said: you’re on your own.

You begin to see why global markets have traded more and more on edge, tilting deflationary given both these developments as well as the more global situation responsible for them.

What the Chinese have left is what continues to be absent from the overall monetary therefore economic picture; still no foreign assets.

Foreign exchange balances are the tiniest bit higher, though practically unchanged rather than anything close to the “too much” money, flood of Jay Powell dollar liquidity everyone still talks about over here in the West.

Banks in China have about $1 trillion in foreign currency deposits, some of which are unconverted export receipts and investment flows.

Analysts said the rise would force banks to freeze more of those dollars, slowing the yuan’s pace of appreciation by deterring dollar inflows in the longer term.

Nowhere is it noted that the pace of yuan’s appreciation had abruptly changed already in February (below).

And now, mandated at the same time as the RRR cut earlier this month, China’s authorities added another increase to foreign reserve requirements begun last week. Why? According to “widely believed” mainstream sources, the same “rapid appreciation” as June:

The move would force banks to set aside more of their FX deposits, which stood at $1.02 trillion at end-November, and markets widely believe the decision is intended to slow the yuan’s recent rapid appreciation.

Huh? CNY’s rapid appreciation was 2020, not 2021, and last year no one was in any hurry to stop it let alone introduce these reserve requirements. Maybe instead the Chinese are more concerned about the persistent lack of dollar inflows (to the point they’ve clearly had to hide it), and in lieu of the dollar inflows to its balance sheet which really should have happened long before now, those authorities are attempting to “borrow” some of those unofficial reserves in anticipation of the same thing which has led them to already cut the RRR also twice this year.

Deflationary money potential.

Those foreign exchange reserve requirements end up flowing onto the PBOC’s balance sheet in the form of Other Foreign Assets; which, as noted before, have been rising since the same month the US Treasury yield curve’s long end began to flatten.

But that’s not the only “other” to consider from PBOC line items. In addition to those Other Foreign Assets, China’s central bank also reports just plain Other Assets which bears a reasonable correlation to CNY’s movements, too (above and below). Just what’s going on here, that I’ll have to save for another day (and even then it’ll be speculative). What will have to suffice for now, the word which seems operative for Other Assets is: intervention.