Chinese banks used swaps to build short positions in the dollar of around US$100 billion

Bloomberg (gated) carry the report on exposures of Chinase state-owned banks.

In summary:

• State run Chinese banks have used FX swaps to prop up the yuan
• Bloomberg cites estimates that the banks have built short positions in the USD of over USD100bn
• Which has created “virtually risk-free returns of about 6% as recently as July for traders who took the other side” … since July, of course, those profits have moderated as the yuan strengthened

Bloomberg add on the shifting of risks:

• It’s the latest side effect of China’s shifting approach to currency management, following a botched devaluation in 2015 that led authorities to burn through $650 billion of foreign-exchange reserves trying to stop the yuan from falling to levels they feared could prompt capital outflow or harm domestic companies who’d borrowed abroad. With banks now bearing the brunt of efforts to support the yuan, China has been able to stabilize the currency without a drop in reserves that might encourage a pile-on by bearish speculators keen to test how much firepower the People’s Bank of China is prepared to deploy.

Update USD/CNH (the offshore yuan – its strengthened since July):

This article was written by Eamonn Sheridan at www.forexlive.com.