08 Jun, 2021 01:45 am

The Mysterious $85 Billion Surge In China's FX Reverse Repo

The Mysterious $85 Billion Surge In China's FX Reverse Repo
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By Ye Xie, Bloomberg reporter and Markets Live commentator A mysterious surge in dollar lending by Chinese banks in an arcane corner of the financial market is leading some investors to wonder whether it’s somehow related to the “stealth intervention” by the PBOC to slow yuan appreciation.For years, Chinese banks had little use for foreign-currency reverse repo, which is effectively collateralized lending.“Historically, Chinese banks FX assets and liabilities have consisted almost exclusively of loans and deposits,” Alex Etra, a senior strategist at Exante Data who previously worked at the New York Fed, wrote in a blog post.A lot of these flows have been absorbed by Chinese banks, while the PBOC shows few signs of intervention on its balance sheet.

It’s debatable whether Chinese banks are accumulating dollar assets and taking on more currency risks for commercial reasons, or if they are acting on behalf of the central bank to engage in “stealth intervention.The curious surge in dollar lending in the derivative market could be a good starting point.

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