IMF Politely Asks China To Explain Exactly How Large Its FX Forwards Book Is

On the heels of China’s move to devalue the yuan on August 11, the market’s attention abruptly shifted to something we’d been discussing for quite some time. Namely, China’s rapidly depleting FX reserves.
The problem for China was that they wanted to devalue, but they wanted to do it on their terms and that’s not something that was particularly agreeable to the market. What was immediately apparent to us, but what it took weeks for most observers to understand, was that the PBoC actually transitioned to an FX regime that afforded the market less of a role in determining the exchange rate, not more. Before, China would reset the daily fix to dictate where the spot traded. In the new system, the PBoC simply manipulates the spot in order to dictate the fix, which from August 12 was supposed to ‘better reflect’ the previous day’s trading. But if the previous day’s trading was dictated by PBoC intervention, then the entire endeavor is meaningless.
Of course daily spot interventions cost money. Lots of it. Especially if the market smells a rat and thinks you may be angling for a larger devaluation down the road but are unwilling to just rip the band-aid off and move to a free float now.

This post was published at Zero Hedge on 03/21/2016.