State banks use derivatives to quietly support the yuan

China’s central bank and Chinese lenders increased their holdings in onshore yuan forwards to US$67.9 billion in August as part of a multi-step strategy to bolster China’s currency against the US dollar, Bloomberg reported, citing China Merchants Bank and Goldman Sachs. Rather than sell dollars and buy yuan, China’s large state banks borrowed dollars in the swap market, sold the US currency in the cash spot market and used forward contracts with the central bank to hedge those positions–a derivatives-based strategy that allowed them to intervene in the market without diminishing the country’s foreign exchange reserves for the time being.