If you were the Government of China, what would you do to stabilize the Yuan and stock market?

Best answer gets dinner on me at Spec annual rendezvous.

Dylan Distasio comments: 

Somewhat tongue in cheek…

1.Eliminate all restrictions on position size for stocks/futures
2. Eliminate all restrictions on foreign ownership of A shares
3. Let the currency float with no intervention
4. Let creative destruction run its course
5. ???
6. Profit





Speak your mind

7 Comments so far

  1. Anon on January 12, 2016 4:05 pm

    Make a further adjustment to the 1 Child Policy to make it mandatory for every couple to have 3 children.

  2. Gerhard on January 12, 2016 4:12 pm

    Sell foreign govis and (let) buy equities

  3. none on January 13, 2016 12:31 pm

    None of the above.

    Doing nothing is ‘doing something’.

    Continue to do as you’re doing, as markets are always efficient even though many suggest they are not. The efficiency of markets break from time to time, as today in china. This is the efficiency that china can use to its advantage.

    Changing mid stream, as in trading real time systems or methods is not a good idea, as it would not be a good idea for china to do any of the above here.

  4. Michael on January 14, 2016 2:59 am

    In regards to the chinese stock market, I would not be an advocate of intervention. Eventually the selling will exhaust its self and the wild emotion will calm down. Level headed buyers will recognize that market valuations are far below rational levels and begin picking up equities on the cheap, creating a solid base in which to build another bull run.

    In regards to the Yaun which is a fiat currency like most of the globes currencies, I would stabalize the currency by allowing the Yaun to float freely in the forex markets. I wold also take the immense amount of gold reserves China has accumulated and allow the currency to be converted to gold therefore creating a gold standard. With the Yaun convertable to gold the globe would have another safe haven. Initially I believe the Yaun would rise, which is the opposite of what their central planners would prefer because this will make their exports more expensive to the world. The currency rise will be temporary and will eventually plateau and stabilize. This currency stability will provide businessmen and governments with a proper baseline in which they will be able to conduct domestic and international business without fretting much about large unpredictable currency swings, and the havoc they can play on international trade.

  5. @arthurbarbato on January 14, 2016 1:34 pm

    I would back-test with a modified Keltner/Bollinger banding.

    The parameters determined by the desires of CCP/CPC tempered by the reality of liquidity, immediate impact expectations, and volatility.

    I would then initiate sells above a third deviation and buys below a third deviation to slowly adjust the levels to satisfy the CCP/CPC as best we can do without undue harm or disruption to the largest Chinese companies.

    I’d also have a hot line to the trading desks of The People’s Bank of China and also have active off-brand desks in London, NY, Hong Kong, Chicago and Shanghai with the four largest Chinese banks.

    Additionally, I’d employ VN, LRW with eight-figure retainers.

  6. H on January 14, 2016 7:08 pm

    The solution should be a combination of the remedies they have employed, only executed in concert with each other and deployed at the same time.

    The draining of CNH liquidity and squeezing of short-term funding was amazingly effective at narrowing the on/offshore spot spread from 2.5% to par in only three trading sessions without using any of their FX reserves. This should be deployed in conjunction with selling of USD/CNY onshore, a market lacking international speculators and IBs and one that China can more easily (and cheaply) push lower — a 200 pip move lower onshore will absolutely wreck the offshore USD/CNH longs. They have recently reversed course on their methodology of setting the fixing to the onshore 4:30pm Beijing close. This has been met with cheer by CNH shorts that decry government manipulation and embolden their short thesis of the currency as a rubber band that will sooner or later snap. By pushing onshore spot down and re-marrying the fix to the close, China will not only make the fixing transparent to quiet its detractors, but also communicate a short-term intention to stabilize the CNY against the USD while pent-up diversification outflow demand continues to take place (by corporates, local savings, etc.). In short, 1) maintain high offshore implied funding rates to flush out speculative CNH shorts (a tried and true CB defensive maneuver), while temporarily support the value of the CNY onshore and re-marry the daily fixing to demonstrate transparency and instill confidence domestically and internationally.

    The circuit-breakers were too close (5pct for 15min break, 7pct to close for day), especially if you adjust for the vol of the China markets relative to other global bourses. A more thoughtful set of circuit-breakers such as the ones in the US (https://en.wikipedia.org/wiki/Trading_curb#United_States), with thresholds vol-adjusted upwards for the volatility of the Chinese market, should be put into place. This should be done in conjunction with active support on the days of its reinstatement (something they could not do previously because the session ended after only 29 minutes even after a 15min halt). Lastly, state buying seems to be very well publicized, perhaps due to the buying of shares of SOEs. This undermines market confidence as the buying is asymmetric and the fact that state intervention is going on sends the wrong signals and impacts sentiment. They should emphasize discretion in their execution and execute via index ETFs (supporting all stocks, not just SOEs). Demonstrated market strength in the face of reinstatement of circuit-breakers (the previous scapegoat for the rout), combined with a slight appreciation of the CNY and control of the offshore speculative attack, should instill enough confidence domestically to steady equity sentiment and kickstart a virtuous cycle of improving confidence.

  7. Chebyshev on May 14, 2016 10:17 am

    China does not have enough economic resource and the weapons to stabilize the Yuan.
    The central government have to give up some political rights to normal people so that normal people
    will be more interested in investing.

    Right now, too many people saving too much money in bank and they just do not know where to invest because of the silly politics. It is not necessary to be a political revolutionary. As an example,
    China government may consider to give up the control to the education market and book publishing market.


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