2014-08-08

PBOC Scales Back Intervention Again

From last month: PBOC cuts back on intervention, but not totally hands off
The rough balance of dollar supply and demand in the market as a result of these developments will enable the central bank to reduce the frequency of its operations to control the yuan's exchange rate in future.

But the PBOC -- with a trading room of its own in the China Foreign Exchange Trade System and often acting via state banks -- is likely to keep quoting the yuan every day and conducting routine trading through which it can guide its movements and prevent its value from running out of control, traders said.

"All data points to evidence that the central bank has indeed reduced its intervention into trading to influence the value of the yuan in recent months," said Liu Dongliang, a currency strategist at China Merchants Bank in Shanghai.

Now there is this: China PBOC Economist Says Will Exit FX Market Interventions
Market interventions are only conducted when the exchange rate's movements exceed the regulated range, when the authorities see a big imbalance in the capital account or a financial markets crisis, the former Deutsche Bank economist said.

He said that a move to lower the reserve requirement for all financial institutions will depend on economic conditions, liquidity conditions and changes in the international balance of payments.

Foreign exchange purchases are gradually losing their significance as a source of liquidity in the banking system, Ma said.
The latter part is the big story. China is transitioning to a "post-dollar" financial system. The PBOC isn't going to suddenly dump Treasuries and they may continue buying for various reasons, but the structural need to hold dollars is reduced enormously.

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