PBOC Discloses Currency Forward Positions as Yuan Stabilizes

Updated on
  • Central bank held $28.9 billion in short derivatives contracts
  • Reported position seen as `surprisingly low' amid intervention

China’s central bank revealed its short foreign-currency positions in forwards and futures for the first time, providing more clarity on the monetary authority’s efforts to shore up the yuan.

The People’s Bank of China held $28.9 billion of such positions with commercial lenders as of the end of February, which mainly reflects the currency hedging demand from domestic companies, according to a statement posted on its website. The amount is less than half of the average monthly decline of the country’s foreign reserves since August, when China made a surprise devaluation of the yuan and allowed market forces to play a bigger role in setting the exchange rate.

The release of the data follows speculation that the central bank was increasingly using derivatives to bolster the yuan, a more opaque method of intervention that won’t immediately draw down its foreign reserves. The yuan has rallied against the dollar this month by the most since September 2010 as capital outflows slowed and the government stepped up efforts to stimulate the economy.

The PBOC’s forward position is “surprisingly low given the market volatility and the massive intervention,” Sacha Tihanyi, senior emerging-market strategist at TD Securities in New York, said by phone. Disclosing the data is another step by the central bank “toward being more transparent” and to build confidence with investors, he said.

Comprehensive Picture

China’s foreign reserves dropped by $28.6 billion to $3.2 trillion in February, the smallest decline since June and less than the $40.9 billion decrease forecast by economists surveyed by Bloomberg. The central bank burned through $513 billion of the stockpile last year, raising concern that the coffers may soon drop below sufficient levels. 

The reserves figures 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. The International Monetary Fund, which awarded the yuan reserve currency status last year, was pushing China to disclose more data on holdings of derivatives, the Wall Street Journal reported earlier this month. The Washington-based lender issued a statement on March 22 saying that China was disseminating data in accordance with its standards and that it hadn’t asked for additional information.

“It looks like this is the first time they are reporting their forwards book, and we finally get an idea of their forwards intervention,” said Khoon Goh, a senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd.

Hedging demand from companies has increased since last year as the yuan became more flexible against the dollar, the PBOC said in a footnote accompanying the data release. The central bank will keep providing currency hedging products based on real needs when the forwards contracts mature. Such operations will have limited impact on the size of its foreign reserves in the future, it said.

— With assistance by Tian Chen, and Ye Xie

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