[HONG KONG] The offshore yuan climbed to the strongest level in more than a month after data signaled that China's central bank is supporting the exchange rate.
The nation's foreign-exchange reserves shrank by US$99.5 billion to US$3.23 trillion in January as the central bank was seen intervening in both the onshore and offshore markets to slow the yuan's decline.
The contraction was less than a Bloomberg survey's median estimate of a US$120 billion drop amid speculation that the figures don't include the People's Bank of China's (PBOC) actions in the currency forwards and swaps markets.
The yuan traded in Hong Kong advanced 0.03 per cent to 6.5438 a US dollar as of 10:53 am on Thursday, data compiled by Bloomberg show.
It earlier rose to 6.5275, the strongest since Dec 23. China's onshore financial markets are closed this week for the Lunar New Year holiday.
"They don't need to burn down their reserves immediately as they can use the swaps market instead and use dollars as collateral," said Zhou Hao, an economist at Commerzbank AG in Singapore.
"The dollar's weakness over the past week is helping the offshore yuan."
The Bloomberg Dollar Spot Index, a gauge of the greenback's strength against 10 major peers, declined 1 per cent this week as Federal Reserve Chair Janet Yellen said the US central bank may delay policy tightening.
Interpreting the smaller-than-estimated decline in China's foreign-exchange reserves doesn't give the complete picture, according to a Feb 7 note written by Sue Trinh, Hong Kong-based head of Asia foreign-exchange strategy at Royal Bank of Canada.
Action taken through forwards don't show up right away, while intervention conducted by commercial banks on behalf of the PBOC would only show up in headline reserves if those banks square their positions, she wrote.
Kyle Bass, the hedge fund manager who successfully bet against the US housing market, said China may be forced to print more than US$10 trillion of yuan to recapitalize banks in case of a bad loan crisis, pressuring the currency to decline more than 30 per cent against the dollar.
Should the Chinese banking system lose 10 per cent of its assets because of nonperforming loans, about US$3.5 trillion in equity will vanish, Mr Bass wrote in a letter to investors obtained by Bloomberg.