> 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 do

> 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.