Updated April 7, 2016 8:07 a.m. ET
Beijing may want to declare “mission accomplished” in its war over the yuan. But the tactics it used may obfuscate the price it paid to get there.
China’s foreign-exchange reserves rose $10 billion in March to $3.22 trillion, breaking a disconcerting four-month depletion streak. Part of that can be chalked up to valuation effects. A rise in the euro rose made China’s holdings in that currency look larger when reported in dollars. Still, the numbers seem to show that—for now—Beijing no longer has to spend heavily to keep the yuan steady.
A closer look, though, raises questions about how Beijing has managed to glaze over worries about outflows. It had long been extremely difficult to quantify Beijing’s maneuvers in currency markets. The best estimates came from stringing together disparate sets of data related to foreign exchange, including reserves figures.
Since December, however, at the behest of the International Monetary Fund, China has been reporting its currency forwards positions—in theory, a crucial piece to the multibillion-dollar puzzle that is China’s yuan management. Many expected to see evidence of massive interventions.
Yet the net U.S.-dollar short position in February, the latest data available, was only around $26 billion, a quarter of what some economists had penciled in. So where did the rest go? The data show most of the forwards were for a year’s duration, so they couldn’t have all matured.
One possibility is that this figure reflects only intervention in China’s restricted onshore market. But that doesn’t square with the onshore forwards market’s daily trading and volume data, which were much lower than the disclosed forwards contracts.
That leaves another place where the intervention could have happened: the balance sheets of state-owned banks. In the past these banks have been conduits for spot-market intervention, both onshore and in the freer offshore market. The risk is, such exposure may not be showing up in the reserves data, and could surprise investors down the road should the central bank be forced to absorb those positions.
Unfortunately for investors, this relatively new data raises more questions than it answers. The more circuitous the routes to propping up its currency, the less conviction investors may have in its stability.
Write to Anjani Trivedi at [email protected]