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 Inc.
The People’s Bank of China (PBOC) might 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 (賴志文) and Junjie Tang (唐俊杰) wrote in a note on Tuesday.
While Lai did not 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 stockpile, the world’s largest, shrank by US$28.6 billion last month, the smallest decline since June last year, to US$3.2 trillion. That was lower than the US$40.9 billion decrease predicted in a Bloomberg survey of economists, and compares with December last year’s record drop of US$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,” Hong Kong-based Lai said. “Otherwise there will be market panic.”
China’s State Administration of Foreign Exchange (SAFE) yesterday said on its microblog that assets of the nation’s sovereign wealth fund, China Investment Corp (CIC, 中國投資公司), are not included in the country’s foreign-exchange reserves. SAFE, which did not name Daiwa, said its reserves are ample.
The PBOC did not immediately reply to a faxed request for comment. Two calls to CIC’s press office went unanswered.
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 US$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 (易綱) was cited as saying by Market News International.
Bloomberg Intelligence estimates that a record US$1 trillion fled overseas last year. The official foreign reserves data do not necessarily give a comprehensive picture because non-PBOC institutions might absorb flows, Goldman Sachs Group Inc economists wrote in a note on Monday.
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