People's Bank of China: Chinese Dollar Bulls

Moves from the People’s Bank of China recently to force commercial banks to build U.S dollar reserves, in a move that holds down the value of the Chinese Yuan, and in effect implements exchange rate intervention, have been revealed by HSBC’s currency team in Asia. The central bank has moved five times in five months to increase the reserve requirements, and stepping up the rate of increase with two extra moves in late June. The moves have increased the mandatory holdings of dollar reserves, from 15% to 17.5%, of anything that is lent out by commercial banks. The impact has been to peg the Yuan lower, and in that in effect has eased the burden of Chinese exporters struggling with a global economic slow-down.

It is estimated that just under $50B was moved in June alone, and that will be added to by the cuts to the amount of foreign debt Chinese banks can hold, once again forcing those banks to be net buyers of dollars. China’s foreign reserves now stand at close to $1,800B, and moves in that market will have knock-on effects to all global forex markets. It may now be a little clearer as to the instigators of the dollar index buying when the index recently hit 71.50, however, the question now may be whether those moves can hold, and whether overseas funds have had their fill of dollar buying. Maybe it will be a case of maintaining current valuations rather than having to add to them, because after all, once the world knows that they players have been at work, they are normally already done.