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Behold: A Chinese Liquidity Crunch

Earlier on Thursday we got official confirmation of what has been quite obvious for months. Namely, China is liquidating hundreds of billions in USTs in a frantic effort to stabilize the yuan following this month’s historic devaluation. 

Of course selling USD assets sucks liquidity out of the system which works at cross purposes with the multiple policy rate cuts Beijing has resorted to over the past several months, which means that the more China intervenes in FX markets the more offsetting RRR cuts will be required in a race to the bottom that will see rates at zero, along with China’s UST reserves. Over the past two weeks, China has sought to mitigate this self-feeding loop by injecting liquidity via short- and medium-term lending ops and, most dramatically, via 7-day reverse repos. 

For the full backstory, see "China Rushes To Inject Hundreds Of Billions In Liquidity To Offset Yuan Intervention," but the extent to which China is desperate to save its RRR cut dry powder by trying to mitigate short-term, FX intervention-induced tightening via emergency liquidity injections can be readily observed in the following chart.