PBOC Using Stealth Intervention as Reserves Decline, Daiwa Says

China’s central bank is probably using stealth measures to intervene in the foreign-exchange market and shore up its currency...

China’s central bank is probably using stealth measures to intervene in the foreign-exchange market and shore up its currency reserves, according to Daiwa Capital Markets.

The People’s Bank of China may have bought foreign currency from local banks, used the forwards market to prop up the yuan and asked the nation’s sovereign wealth fund to liquidate overseas assets, Daiwa analysts Kevin Lai and Junjie Tang wrote in a note on Tuesday. While Lai didn’t provide any direct evidence in the note, he said in an e-mailed response that his conclusions were based on a “logical deduction.”

China’s foreign-exchange reserves, the world’s largest currency hoard, shrank by $28.6 billion last month, the smallest decline since June, to $3.2 trillion. That was lower than the $40.9 billion decrease predicted in a Bloomberg survey of economists, and compares with December’s record drop of $108 billion as the monetary authority supported the yuan.

“As everyone is watching the foreign-exchange reserves number so carefully, it is important for the government to show a nice number,” said Hong Kong-based Lai. “Otherwise there will be market panic.”

The PBOC didn’t immediately reply to a faxed request for comment. Two calls to the press office of China Investment Corp., the nation’s sovereign wealth fund, went unanswered.

Yuan Speculators

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The monetary authority launched a two-pronged attack on yuan speculators earlier this year, choking outflows from the mainland while mopping up the currency offshore. The nation’s defense of the yuan depleted its foreign-exchange reserves by $513 billion last year, the first annual drop since 1992. The purchase of foreign-currency assets and repayment of overseas debt by companies and individuals contributed to the drop, PBOC Deputy Governor Yi Gang was cited as saying by Market News International.

Bloomberg Intelligence estimates that a record $1 trillion fled overseas in 2015. The official foreign reserves data don’t necessarily give a comprehensive picture because non-PBOC institutions may absorb flows, Goldman Sachs Group Inc. economists wrote in a March 7 note.

–With assistance from Helen Sun and Yanping Li To contact the reporters on this story: Saijel Kishan in Hong Kong at skishan@bloomberg.net, Enda Curran in Hong Kong at ecurran8@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Robin Ganguly, Phani Varahabhotla

By: Saijel Kishan and Enda Curran

©2016 Bloomberg News

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