The Chinese have never subscribed to the modern wave of “transparency” which has swept over Western central banks. The People’s Bank of China, Big Mama, very much operates instead on the doctrine which preceded it. Basically, Montagu Norman’s way of doing things.

Never explain, never excuse.

This mantra has been applied to what it does outside of China as much as inside. Even when participating in the IMF’s data scheme for the first time in 2016, central bank authorities somehow left more off the template than they managed to fill in. Especially the important parts contained within Section IV. As I complained in March of that crucial year:

No swaps, options, swaptions or forwards, just $33.7 billion in almost perfectly balanced repo. It is possible that this is correct as the PBOC will often use its influence to get banks to undertake any direct interventions on its behalf, leaving individual bank balance sheets containing the appropriate balances. However, in this case given these conditions, that was not likely as even if Chinese banks were directed (meaning no alternative but to follow policy intentions even if reluctantly) to wholesale means of enforcing a CNY peg that still would have left a future leg (forward) leading back to the PBOC.

What the hell does that even mean, you ask? Never explain, never excuse. The central bank acts in overseas currency markets, we all know this. But how it acts, and by how much, go figure.

Unlike most other authorities the rest of the world, the PBOC doesn’t need to ask permission for the banks under its authority; that particular word taken literally and to its furthest extent under the Communist regime. If the China’s central bank wants something done, and doesn’t want to leave a trace of that thing being done, make the state-owned banks do the deed(s) and bury it on their books. Any paper trail stops cold.

In the case of 2015-16, that had meant trying to arrest CNY’s dizzying descent. Notably, the decline followed very clear stages (ticking clocks) indicating Chinese officials and their minions were still new to it; of course they were, this falling yuan menace had shown up just a few years before (January 2014) catching them and more so everyone in the West completely off-guard.

The problem was global dollar shortage, pretty obvious, too, not that anyone could figure this out in the age of QE and so many bank reserves reported to be monetarily useful in these kinds of global settings. Bunk. Instead, the eurodollar system had begun to go fickle on China/EM’s in 2011, then made the big turn toward tightening around the end of 2013.

Deprived of easy, flexible dollar funding everyone around the world needs, the Chinese most of all (synthetic short), what do you do? Monetary authorities have few options, none of them good (even though the mainstream textbook claims this an easy fix). The most obvious is to straight up sell your reserves; if the eurodollar market won’t supply the needed dollars, then supply them yourself.

The problem with this method is threefold: first, there’s the internal constraint this imposes on your local currency system. Pretty straightforward external tightness transferred inside.

Second, central banks attempting to substitute something they do, anything they do, for what the market won’t do, any market, is a recipe for disaster. Selling Treasuries in this case, as China began doing heavily in the middle of 2014 (above), supplying dollars this way officially doesn’t actually make up for what’s not coming in organically from the eurodollar market (a thoroughly rigid bureaucracy is the last thing which might be able to make itself a useful alternate to a deep, dynamic marketplace).

The bigger downside, the third problem, is the target you paint on your own back. By selling Treasuries and mobilizing reserves you are basically begging for more trouble; blatantly advertising your own distress to that very same eurodollar market which is already reluctant to fund your synthetic short position in the first place. Basically confirming what the market already presumes, pro-cyclicality in the extreme.

That pretty much sums up China’s calamitous 2014-16 experience (and explains a good deal of the 19th Communist Party Congress and what came out of it in late 2017).

So, if direct measures aren’t much of a way forward, what then? As I’ve written before, there’s this Brazil strategy which is undoubtedly what the Chinese had adopted sometime before the middle of 2017. The caveat, the difference between how Brazil has operated this and the Chinese version goes back to Montagu Norman; the Brazilians dutifully fill out the IMF template, completing Section IV, and report to the world the extent of their indirect activities aimed at “supporting” their currency.

The way in which the currency is supposed to be supported is via the local banking system. I wrote the following in July 2015 just as the Brazil strategy was imploding in on Brazil, while at the same time the textbook strategy was just about to blow up on China:

The nation’s central bank, Banco do Brasil, launched what were called currency swaps but were really something else – long story short, it was the means (cupom cambial) by which to influence local banks to import more “dollars”, the practical effect of which was to incentivize Brazilian banks to increase their “dollar short” at a time when the short was the problem.

Whether it works or not, the key is to get local banks in Brazil, China, or anywhere else where this idea is put into practice to bid for more dollars by offering them what amounts to a hidden subsidy for them. The catch, if you will, is this subsidy doesn’t come cheap to the central bank – especially when dollars systemically are harder and more expensive to source.

But, if you are the PBOC, have state-owned banks at your disposal, and continue to operate under Norman’s doctrine, just hide everything and hope the ambiguity makes it go your way until the original issues all just hopefully go away.

This seems to be what’s going on in 2020 ever since the end of May. Yes, reopening leading to a better eurodollar pool…at least when compared to March and April. Hardly a standard by which to judge.

And yet, CNY has miraculously rebounded as if supported by the very digital dollar deluge Jay Powell’s been insincerely yacking about since GFC2. See, flood! CNY!

The problem is what we don’t see, which doesn’t indicate flood at all (I understand the confusing phrasing here, in that how can what you don’t see indicate anything?)

The simple truth is that if this was an inflationary flood of global dollars getting the world back to normal, let alone beyond normal into some inflationary, dollar-crashing excess, then dollars would be showing up in China’s official pockets; any one of them, but especially the PBOC’s on its balance sheet.

This just isn’t happening.

Thus, we are left to suspect, first, no flood, and, second, PBOC shenanigans involving their local banks, hidden often derivative maybe off-balance sheet arrangements all with the same purpose as the Brazilian strategy without the bother of any disclosures. Keep everyone guessing and hope that, as CNY goes further, people just buy the reflation/recovery story.

Exactly like late 2017.

Only this time, I’m not the only one who’s noticed. The US Treasury Department – the Treasury Department!! – won’t call the Chinese a currency manipulator but in its latest report (December 2020) prepared for Congress on the subject our government admits:

The PBOC appears to have refrained from intervening in foreign exchange markets in 2019, but financial entities beyond the PBOC (notably state banks) purchased foreign exchange on net over the four quarters through June 2020. While intervention proxies do not provide definitive evidence that the PBOC intervened in foreign exchange markets over the review period, this issue warrants further investigation. In particular, the small scale of foreign reserve accumulation relative to China’s substantial trade and portfolio inflows in the second quarter of 2020, coupled with the RMB’s relative stability over the same time period, raises concerns. [emphasis added]

Doubly so since, by the textbook, currency “manipulation” is commonly thought of as intending to weaken anyone’s exchange rate. The opposite is going on here – monkey business rather than conventional manipulation – and you really have to ask why that is (understanding the fall down this rabbit hole will eventually change your views on everything; and that’s a good thing).

Yep. CNY’s “relative stability” coupled with “the small scale of foreign reserve accumulation” equals the Chinese version of the Brazil strategy leaving such an obvious discrepancy that even the folks at Treasury (who are good people, by the way, they just have no frame of reference, thanks to Economics, from which to accurately interpret implications and details) feel they have to tell Congress (oh boy) a little bit about it.

And the discrepancy is only getting bigger; CNY up, and still no dollars reported. In the latest TIC figures, for instance, mainland Chinese holdings of UST’s continue to decline. Not only that, the balance reported from Belgium shot upward (almost certainly Chinese banks depositing bonds at Euroclear as collateral for currency transactions) by a significant amount while at the same time the one coming from Hong Kong declined sharply.

It’s as if there’s still some 2017 possibly left in here somewhere.

Since we’ve been writing about this for a long time, I’ll finish by reprinting from one of those earlier efforts:

To recap: by the PBOC making it so obvious they’re intervening in their dollar short, they are further confirming that the dollar issues they’ve been experiencing for the vast majority of the time since 2013 haven’t come close to being dealt with by anyone on either side of the Pacific. The very stuff of even more rising dollar stuff.

There’s a huge difference between the dollar’s exchange value everywhere else outside of China (or the euro) meandering downward off a crisis extreme, as it is doing right now, and what’s being reported as a massive wave of digital dollars sloshing all over the world threatening its very existence (DOLLAR CRASH!!!!). By what the Chinese are doing, even though we can’t see it, at best this Inflation Hysteria #2 includes about the same from China as Inflation Hysteria #1 had.

Too few reasonably available dollars, in other words. They haven’t really gotten any better at hiding it.