PBOC’s proxies ready to fight

It has been five years since the People’s Bank last dipped into its own foreign exchange reserves on a significant scale to support the currency. Since then, it is widely believed that the exchange rate has continued to be actively managed but with the PBOC using state banks as proxies. Last week, the PBOC again appears to have turned to the state banks, instructing them to ready for dollar sales, according to media reports, as the spot rate approached the edge of the daily trading band. (See Chart 1.) That contributed to a sharp rebound in the renminbi at the end of last week. One interpretation is that the PBOC has drawn a line in the sand. But we suspect the PBOC’s main concern was the speed of the renminbi’s recent moves rather than the level it had reached. The currency is at its strongest against the yen since exchange rate reform in 1994, and its strongest against the won since the Global Financial Crisis.