By Bilal Hafeez
China’s Bizarre May Intervention Numbers (Follow the Money, 5 min read)
(You can read the article by clicking here)
In May, investors were closely following Trump’s next steps amid fears of more trade tensions with China. The yuan was depreciating, and this would usually mean that the PBOC would sell dollars to maintain currency stability and vice versa. The amounts purchased or sold by the central bank are monitored by intervention indexes, often the PBOC FX reserves or FX Settlements. And even though equilibrium levels of overall intervention have significantly dropped in China since 2014, Brad Setser observes a positive correlation between yuan movements and the need to intervene in the past 10 years. When the CNY Spot is high, the PBOC Balance Sheet falls, indicating direct purchases of currency by the bank. Given this analysis, he was expecting a dollar sell-off by Chinese state banks, but puzzlingly, settlement data showed that they were buying instead. Setser has two explanations: either China enforced limits and rations to importers’ and locals’ ability to buy foreign currency in an anticipation of the outflows or the bond index inclusion, or trade surplus and reserve diversification caused hot money to ramp up FX inflows. A key point to take away from this article is that China has tools beyond its FX reserves to manage its currency and attempting to play for sharp CNY moves could be a fool’s errand.
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