Economists spy FX sales by state-owned lenders in PBoC reserve data

China's stash of foreign exchange reserves was roughly steady last month, but economists believed the monetary authority had likely found an alternate manner of propping up its currency, the yuan; namely by instructing state-owned lenders to sell some of their foreign assets.

The People's Bank of China's foreign exchange reserves stood at $3.11trn as of the end of August, which was down from $3,119bn at the end of the prior month.

Economists attributed that reduction to 'valuation effects' on its holdings of assets denominated in foreign currencies, with Freya Beamish at Pantheon Macroeconomics calling attention to the "marked" drop in the value of its euro denominated reserves.

Beamish did see "some" signs in the figures of FX sales by the PBoC, with the monetary authority receiving yuan in exchange, which in turn increases the price of the currency relative to that of others.

Indeed, the currency had strengthened a bit since hitting a fresh low in mid-August.

Julian Evans-Pritchard at Capital Economics on the other hand said that it remained to be seen whether or not the PBoC had in fact intervened in FX markets.

"The big picture is that the PBOC has not bought or sold FX in any meaningful amounts since early 2017," Evans-Pritchard said.

Nevertheless, both consultancies believed that instead Chinese officials were leaning on state-owned lenders to do so on their part.

Explaining the PBoC's motives for acting the way that it was, Evans-Pritchard added: "Declining FX reserves can raise questions over the sustainability of intervention, emboldening those speculating against the currency. FX sales also leave the central bank open to accusations of currency manipulation, even if it is acting to prop up the currency not weaken it."

"Unless we see a further escalation of trade tensions, we think this quasi-official intervention should prevent the currency from weakening much further."

Beamish was a bit more cautious, telling clients: "Overall, the authorities now seem to be aiming for stability on the RMB, with financial risks and trade negotiations in mind.

"This aim will be tested in Q4 as the Fed continues its hiking programme, if anything becoming more hawkish."

As of 11140 BST, the US dollar was eding higher by 0.09% to 6.8415 versus the yuan.