More and more the media are finally starting to get the message about Chinese liquidity and its tendency for or against “devaluation.” For their part, the PBOC has been quite clear about its intentions all along; it was only the impenetrable fog of orthodox economics that prevented more widespread acknowledgement and understanding. There are no “reserves” at least not in the sense that the word actually applies. Instead, there are only various forms of bank liabilities, not all of which are created equal.

The euro/dollar in its most basic conceptualization is chained bank liabilities of all types. The designation of “dollar” only gives it a common framework by which to decode everything; it’s an encryption cypher for what is really an encoded financial system of dizzying complexity. Central banks enter only under certain circumstances and then provide at best tangentially relevant liabilities in the narrowest sense. For a particular bank to buy MBS, for example, they need much more than federal funds or euro/dollars at LIBOR, they need to manage the rate curve as well as jump volatility and liquidity risks (and then they would model volatility of funding in federal funds and euro/dollars!). The Fed might handle the first one, but the rest are far out of its hands.

China offers a bit more complexity but really that is only because the Chinese liquidity system is something of a hybrid. There are the complexities of euro/dollar wholesale but also attached is an internally proportional banking system of the traditional format. If you were to diagnose in very simple terms China’s existential issue, it would be that it used the euro/dollar as a basis for that traditional yuan banking internally. You can then see the problems the central bank would find, where it must figure itself in both wholesale euro/dollars while trying simultaneously to reckon that in “normal” banking inwardly.

Since March 2015, that has no longer been possible. I still have yet to identify the specific or proximate cause (I have theories), but the euro/dollar problem morphed to something else and forced the PBOC to abandon its more measured balancing act. That pressure has only increased over time even if the PBOC manages to “buy” periodic calm here and there.

Going back to August and the first really open outbreak of internal/external disorder (the break in March was, unfortunately, largely unnoticed or misunderstood), we find a now-familiar pattern emerging:

The authority earlier auctioned 150 billion yuan ($23.4 billion) of seven-day reverse-repurchase agreements, more than the 120 billion yuan that matured. In addition, it gauged appetite for loans under its Medium-term Lending Facility, after extending 110 billion yuan last week.

“The injections through open-market operations and MLF failed to bring borrowing costs lower,” said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. “That’s why the PBOC has had to make such an aggressive move. It was unexpected to have them cutting both interest rates and RRR.”