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China: PBOC moves into FX swaps

In an historic move in late November, the People’s Bank of China, the country’s central bank, conducted the first ever swap of renminbi with the US dollar, a move that it intends to repeat fortnightly.

The initial swap involved 10 domestic banks buying $6 billion from the PBOC in exchange for renminbi at the prevailing spot rate, with the agreement to swap the dollars back in 12 months’ time at an agreed rate of Rmb7.85 to the dollar. That compared with a spot rate of 8.0805 and the non-delivered forward rate of 7.76 before the deal. The NDF rate adjusted after the deal to 7.78.

A tiny swap by normal market standards might not seem worth shouting about but in China’s surreal financial system any semblance of normality attracts disproportionate attention. Commentators noted that the PBOC’s actions were a further indication of an inch-by-inch opening of China’s capital account.

The move also helps economists to read China’s foreign exchange runes.

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