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> No matter how much capital the hedge funds can muster it will be puny compared to PBoC resources This is incorrect. Hedge funds borrow and create temporary m

by neximo4 11y ago

> No matter how much capital the hedge funds can muster it will be puny compared to PBoC resources This is incorrect. Hedge funds borrow and create temporary money by writing derivative contracts such as options, futures & swaps. It is by this logic they can actually muster more funds than the PBOC in aggregate. Quite simply the market for currencies is bigger than the PBOC and the hedge funds, but there are more hedge funds that are richer than the 3T in reserves the PBOC has access to. This is partly why the PBOC uses the overnight rate to limit resources (such as to affect the interest rate of the derivatives instead of the Yuan prices they bear). It would be possible to profit by arbitraging the interest rate so this would make using derivatives expensive too. Of course affecting interest rates affects the entire economy as a whole and is unsustainable.

fspeech 11y ago
There is relative little rmb outside the country. Not everyone can just go inside China and borrow yuan and buy USD. If you are talking about non deliverables, who will be your counter party if everyone wants to go short?
- neximo4 11y ago
  > There is relative little rmb outside the country. There doesn't need to be any, so long as the counter currency exists (the USD, EUR, JPY, etc) there can be a control against the onshore yuan, whether it trades or not. There is always a counter party, It can be created using swaps to other currencies and to other companies actual cash flows. I wouldn't want to argue against this topic excessively because its a fairly clear cut case of 'this time its different' with China, primarily through marketing. I'd point out that on previous occasions in history, the gold & silver pegs, various cross currency pegs. It has always been the case the price setter has assumed they were bigger than the market and it has always turned out the opposite. It is also because the market can stand the test of time. This combined with today's use of leverage & derivatives is an even more dangerous combination. Markets always assume the correct rate, because if not there is something that can be profited from. None of what I say precipitates bias, I'm not against China's rise. I even believe the GDP numbers out of China, as I mention in another comment on this page. This is just the basis of how markets work. The predicate of your assumption is the PBOC is bigger than the market for Yuan trade and this is incorrect. In something as liquid as a currency a counter party will always be available.
  - fspeech 11y ago
    If market is forced to trade at an artificial price often the result is illiquidity. Swap or not eventually someone has to be on the long side. I didn't say PBoC is bigger than the market. I said it is bigger than the offshore market. I don't see how that is controversial. It can shut down the offshore market if it wants to.
    - neximo4 11y ago
      > If market is forced to trade at an artificial price often the result is illiquidity There is, Offshore-Onshore spread & HKD interbank rate. > It can shut down the offshore market if it wants to. Not forever, markets can do what they are without any limit. The PBOC loses money or hurts China's economy doing this and it cannot be sustained. > Swap or not eventually someone has to be on the long side. There is always a counter party as someone will need to buy something in China. Not every flow is speculative. It is a very large exporter economy, if not the largest. A swap allows finding a counter party in a currency that is not the Yuan at the cost of the interest rate differential. Finding a counter party is actually very easy, especially with exchange rate swaps. It does not require a Yuan counter party with physical RMB. Instruments such as swaps, options and futures were actually created to provide liquidity in cases when it is withheld such as what is being done. This is what makes today even less different than previous times when it comes to exchange rate pegs. If not a swap, its an option. An option can have a counter party as someone will always be willing to underwrite an option as it pays off a premium that has _no bias_ to the expected price direction of the underlying instrument. Hedge funds know this because they have it all at their disposal. It is simply the cost of time that has to be paid (in terms of options premiums or the swap rates), if they are correct. The PBOC realises this and this is why their options are limited to making the trade expensive as opposed to being able to control it. This is why they jacked up the HKD interbank rate and increased reserve requirements on the RMB. Again, it ought to be mentioned this hurts all HK and China businesses and is unsustainable in the longer run.
      - fspeech 11y ago
        Our positions are not substantially far apart except regarding hedge funds power. You first expanded "hedge funds" to include everyone looking to make a buck; then you said counterparties are easy to find for all these money looking to short. I don't see how that can be logically consistent. If everyone intending to short finds a long to match at the current price, why would that bother the PBoC? As I said I believe the hedge funds bets against the yuan are relatively safe. I believe this is the case because they are working for the PBoC, not against it. The PBoC apparently would not mind the yuan to weaken over time. It just doesn't want it too quickly or disorderly. It wants to give time to companies that borrowed in USD to bet on yuan appreciation to unwind but it does not want to freak out retail savers to jump on the same trade so it is a delicate position. One can debate if such a policy is wise but I don't think it is at all like the all powerful hedgies put a gun to the PBoC's head. Having the offshore yuan trade lower actually provides political cover for the PBoC in Washington. It is just that herding cats can be challenging.
fspeech 11y ago
http://www.barclayhedge.com/research/indices/ghs/mum/HF_Money_Under_Management.html http://www.barclayhedge.com/research/indices/ghs/mum/HF_Mone... Not all of them do macro bets, nor would they concentrate their position 100% against rmb.
- neximo4 11y ago
  No they wouldn't, no one would put their eggs in one basket in terms of risk. Nonetheless the size of markets in control of hedge funds is still larger than what the PBOC has access to. It may be better to substitute 'hedge funds' with anyone out there wanting to make profit through a price anomaly. This amount of people and their money is larger than the PBOC's resources. Also it doesn't always take a sell to lower a price, or a buy to increase a price. It just takes a price that has the largest amount of trades as it does on Monday morning auctions with every currency.

by neximo4 11y ago

fspeech 11y ago

There is relative little rmb outside the country. Not everyone can just go inside China and borrow yuan and buy USD. If you are talking about non deliverables, who will be your counter party if everyone wants to go short?

neximo4 11y ago
> There is relative little rmb outside the country. There doesn't need to be any, so long as the counter currency exists (the USD, EUR, JPY, etc) there can be a control against the onshore yuan, whether it trades or not. There is always a counter party, It can be created using swaps to other currencies and to other companies actual cash flows. I wouldn't want to argue against this topic excessively because its a fairly clear cut case of 'this time its different' with China, primarily through marketing. I'd point out that on previous occasions in history, the gold & silver pegs, various cross currency pegs. It has always been the case the price setter has assumed they were bigger than the market and it has always turned out the opposite. It is also because the market can stand the test of time. This combined with today's use of leverage & derivatives is an even more dangerous combination. Markets always assume the correct rate, because if not there is something that can be profited from. None of what I say precipitates bias, I'm not against China's rise. I even believe the GDP numbers out of China, as I mention in another comment on this page. This is just the basis of how markets work. The predicate of your assumption is the PBOC is bigger than the market for Yuan trade and this is incorrect. In something as liquid as a currency a counter party will always be available.
- fspeech 11y ago
  If market is forced to trade at an artificial price often the result is illiquidity. Swap or not eventually someone has to be on the long side. I didn't say PBoC is bigger than the market. I said it is bigger than the offshore market. I don't see how that is controversial. It can shut down the offshore market if it wants to.
  - neximo4 11y ago
    > If market is forced to trade at an artificial price often the result is illiquidity There is, Offshore-Onshore spread & HKD interbank rate. > It can shut down the offshore market if it wants to. Not forever, markets can do what they are without any limit. The PBOC loses money or hurts China's economy doing this and it cannot be sustained. > Swap or not eventually someone has to be on the long side. There is always a counter party as someone will need to buy something in China. Not every flow is speculative. It is a very large exporter economy, if not the largest. A swap allows finding a counter party in a currency that is not the Yuan at the cost of the interest rate differential. Finding a counter party is actually very easy, especially with exchange rate swaps. It does not require a Yuan counter party with physical RMB. Instruments such as swaps, options and futures were actually created to provide liquidity in cases when it is withheld such as what is being done. This is what makes today even less different than previous times when it comes to exchange rate pegs. If not a swap, its an option. An option can have a counter party as someone will always be willing to underwrite an option as it pays off a premium that has _no bias_ to the expected price direction of the underlying instrument. Hedge funds know this because they have it all at their disposal. It is simply the cost of time that has to be paid (in terms of options premiums or the swap rates), if they are correct. The PBOC realises this and this is why their options are limited to making the trade expensive as opposed to being able to control it. This is why they jacked up the HKD interbank rate and increased reserve requirements on the RMB. Again, it ought to be mentioned this hurts all HK and China businesses and is unsustainable in the longer run.
    - fspeech 11y ago
      Our positions are not substantially far apart except regarding hedge funds power. You first expanded "hedge funds" to include everyone looking to make a buck; then you said counterparties are easy to find for all these money looking to short. I don't see how that can be logically consistent. If everyone intending to short finds a long to match at the current price, why would that bother the PBoC? As I said I believe the hedge funds bets against the yuan are relatively safe. I believe this is the case because they are working for the PBoC, not against it. The PBoC apparently would not mind the yuan to weaken over time. It just doesn't want it too quickly or disorderly. It wants to give time to companies that borrowed in USD to bet on yuan appreciation to unwind but it does not want to freak out retail savers to jump on the same trade so it is a delicate position. One can debate if such a policy is wise but I don't think it is at all like the all powerful hedgies put a gun to the PBoC's head. Having the offshore yuan trade lower actually provides political cover for the PBoC in Washington. It is just that herding cats can be challenging.

fspeech 11y ago

http://www.barclayhedge.com/research/indices/ghs/mum/HF_Money_Under_Management.html http://www.barclayhedge.com/research/indices/ghs/mum/HF_Mone... Not all of them do macro bets, nor would they concentrate their position 100% against rmb.

neximo4 11y ago
No they wouldn't, no one would put their eggs in one basket in terms of risk. Nonetheless the size of markets in control of hedge funds is still larger than what the PBOC has access to. It may be better to substitute 'hedge funds' with anyone out there wanting to make profit through a price anomaly. This amount of people and their money is larger than the PBOC's resources. Also it doesn't always take a sell to lower a price, or a buy to increase a price. It just takes a price that has the largest amount of trades as it does on Monday morning auctions with every currency.