The popular explanation for the rise in Chinese repo rates is being linked to the government's desire to rein in the shadow banking sector. That is to say the tightness is intentional.

But what if it isn't. What if it has more to do with the unwind of yet another carry trade?

Deutsche Bank's Bilal Hafeez made a strong case for this interpretation last week. We think it's worth revisiting the argument.

There are three main factors that need to be considered, he argued:

1. Adjusted for volatility China now offers the highest FX carry in the world. This, he says, has led to a surge in flows into the CNY (and CNH) by both onshore and offshore entities over the last few years.
2. The performance of the carry was reaching breaking point last week.
3. Any combination of higher US yields, regulatory clampdown or higher FX volatility or CNY appreciation could trigger an unwind.

And as he warned, the demise of the carry trade would then remove an important channel of cheap funding for the Chinese economy.