Estimating the PBOC’s Hidden FX Intervention

China has defended its exchange rate for over a year since the August 2015 currency adjustment, but how much longer it can do so occasions debate. While most data indicates that capital outflows have slowed since mid-February 2016 from a torrid monthly pace as high as $100 billion last year, there is some evidence that China’s central bank has concealed intervention to an extent over the past six months both in onshore and offshore markets to promote calm, most likely via forward transactions with commercial banks.

Given the importance and market sensitivity of this uncertainty, clients and contacts have asked us for our best estimates of PBOC intervention. We wish there were more definitive data sources available, but absent that, we believe the most responsible tactic is to work with an indirect, inferential approach. This note seeks to do that, and we welcome additional ideas from our readers to help resolve this question.

We estimate potential hidden intervention by the PBOC based on recent divergence between onshore trading volumes in the foreign exchange markets and known FX settlement transactions as recorded by SAFE, which has been unusually large this year. While we caution heavily that this method does not constitute definitive evidence of PBOC intervention, the approach suggests that China may have seen an estimated additional $237 billion in outflows from March to August 2016, implying FX reserves could have been declining by as much as $50-70 billion per month recently.

Posted August 1, 2017
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