Currency News: IMF Pressures People’s Bank of China
Currency news
China’s yuan has been struggling lately, with the currency experiencing its biggest fall in 5 months at the beginning of March. In response, China began to allow the yuan to depreciate slowly as foreign investors and analysts believed that the currency was still overvalued by 10% in comparison with the US dollar.
Now, the International Monetary Fund has begun to put pressure on the People’s Bank of China, the nation’s central bank, to disclose the details of their currency operations. In recent months, Chinese authorities have turned away from the traditional approach of using reserves to support its currency and turned towards the derivatives market.
The IMF is calling on the PBOC to release more information in regards to their holdings of derivatives, specifically their holdings of forward contracts, which have become their main tool for supporting the national currency. The use of derivatives to stabilize the currency is concerning to many investors as it decreases transparency and makes it difficult to comprehend the bank’s motives and intentions for the yuan. Zhou Ping, chief investment officer at Binyuan Capital Ltd., an asset manager in Shanghai, said, “[it] makes it more difficult to gauge the true scale of capital outflows and the drawdown of the foreign-exchange reserves for the purpose of currency intervention.”
In an effort to achieve reserve-currency status for the yuan, in October of 2015, China pledged to follow the IMF’s special-data-dissemination standards. Soon after, the yuan was added to the list of reserve currencies, but the nation has yet to fully disclose its holdings of derivatives.
Using derivatives as a strategy for supporting the yuan has benefits for the central bank including the ability to slow the use of foreign-exchange reserves, as well as minimizing the drain of the yuan from the system as the country experiences slow economic times.
The PBOC has continued to float the yuan, allowing the currency to depreciate. The response of the IMF to the country’s current strategy in supporting the yuan remains to be seen, but there is currently a public call to increase transparency within the Chinese banking system.
