What was it that touched off CNY’s devaluation in the first place? When it started, “unexpectedly” of course, it was described as intentional policy designed to thwart speculators betting too heavily on the currency’s continued rise. But the first major move in the chess game between the PBOC and “whatever” it is driving the currency was to widen the daily band, an important clue that had very little to do with speculators and everything to do with China’s banks. It was then and remains today those very same banks often in desperate need of “dollars.”

In March 2014, the PBOC even went so far as to authoritatively declare, “there is no basis for big appreciation of the renminbi.” Only there was, it just wasn’t what anyone thought it was. I wrote instead, with admitted frustration:

In the Journal’s formulation, the PBOC is directing affairs, sending out “instructions” that Chinese banks should “aggressively purchase dollars” ostensibly to punish those hot money speculators. Given what we know of copper and dollar financing in general, is that really the case? Is it not more likely that the PBOC has lost control of dollar conditions and was forced by the “market” to widen the daily band in order for dollar-starved banks to aggressively bid for dollars they could not otherwise obtain?

What all this data shows, as opposed to conjecture about the supernatural powers of central banks, is that yuan’s devaluation may be directly tied to dollar shortages. In fact, as I argue here, it is far more plausible that a dollar shortage (showing up as a rising dollar, or depreciating yuan) is forcing the PBOC to allow a wider band in order that Chinese banks can more “aggressively” obtain dollars they desperately need. Worse than that, the PBOC itself cannot meet that need with its own “reserve” actions without further upsetting the entire fragile system.