Snider Sees RRR and Inflow/Outflow Correlation
As you can see on the chart immediately above, the more they pegged CNY the greater the internal illiquidity, leading to several cuts in the RRR later in 2008. Both directions established, we see also very plainly that the CNY rate is a quite good proxy for the “dollar”, or at least some part of it, whether that might be an Asian “dollar” or something even more specific.
These relationships continued on the other side of 2008, too, where in the initial “recovery”, or the times when it looked like it might turn into one, it was as if 2007 all over again. The PBOC began to raise the RRR in the middle of January 2010, a full five months before they finally let go of the CNY peg. We can easily assume that was the resumption of private “dollar” flow alongside the PBOC’s continued “selling UST’s” that also supplied “dollars.”
Though Chinese monetary policy restoration in the RRR paused after the “unexpected” return of potential mayhem in May 2010 with the “flash crash” and sudden interest in Greece, Bernanke’s QE2 later in the year pushed “dollar” flows back to the extreme (not because of the bank reserves created by QE, instead due to bank balance sheet retracement aligned with expectations, ultimately misguided, for QE’s future effects in the real economy and on volatility). Just like May 2007, in November 2010 the PBOC raised the RRR one day (November 16, less than two weeks after QE2 had officially been announced) and announced the next 50 bps hike just three days later.
The RRR hikes continued until the sudden re-appearance of global, unified eurodollar problems all over again in July 2011. The RRR was reduced importantly in the first half of 2012 (starting December 2011), just as the global economy slowed. It has yet to recover. Similarly, the RRR has been only lower ever since, as have, it should be pointed out, commodity prices in general. It demonstrates that the RRR is not really about “tight” or “loose” monetary policy in China, as it is so often described, rather it is an indication of this external/internal balance of “dollar” money and Chinese monetary responses to it.
In that way, the RRR is more of a signal than a lever, a bright sign that monetary problems have arrived rather than any kind of solution to them. The PBOC uses it less on the downside because after the initial monetary contraction phase the central bank looks to other ways to manage “dollar” imbalances. It is a temporary reaction, not a measure for chronic imbalance. That was how it was used in 2013, when the RRR remained constant all that year even though money markets in China went through some really significant turmoil (timed to “dollar” events, especially June 2013, on the EM side of the eurodollar).
The circumstances in 2016 are roughly similar, with some exceptions. Having suffered monetary contraction through eurodollars, the PBOC has been almost hyperactive in other capacities beyond the RRR. There remains disinclination because China itself remains a bounded ball of contradictions; monetary contraction, or at least insufficient expansion internally to fund everything within normal parameters, at the same time as great asset bubbles. Unlike 2013, however, the PBOC is this time using other parts of its balance sheet to offset “dollar” destruction, a very important distinction that demonstrates the gravity of the monetary situation.