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Strategies & Market Trends : True face of China -- A Modern Kaleidoscope

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To: RealMuLan who wrote (2978)	3/9/2008 10:37:15 AM
From: RealMuLan	Read Replies (1) of 12464

[This is old news, but interesting. And I bet BoC has been kept doing this in 2007 too. The only problem is that they may end up losing a lot of their profit in the US sub Prime mess. What a pity!]--"The yuan-funded carry trade, PBOC edition Felix Salmon \| Jan 31, 2007 rgemonitor.com Last week, I wonderered how a yuan-funded carry trade might work. I still don't know how we mere mortals could orchestrate such a thing, but Alea points out that the People's Bank of China has been long dollars while selling low-yielding yuan for years now – and that it's been very profitable for them. He quotes the Economist: The PBOC is earning a handsome profit. According to Stephen Green, an economist at Standard Chartered, it made a profit of $29 billion last year—more than any of the world's commercial banks... Last year, the loss on its dollar reserves, as a result of a modest rise in the yuan, was partially offset by a gain on its euro-denominated reserves as the euro strengthened. Mr Green estimates that, overall, the bank suffered a balance-sheet loss of 26 billion yuan ($3.3 billion) because of currency movements. However, this loss was dwarfed by the PBOC's net interest income. It earned an estimated 343 billion yuan on its foreign reserves last year. On the other side of the ledger it had to pay interest of 90 billion yuan on banks' reserves held at the central bank and on bills it issued to absorb excessive liquidity (largely caused by the surge in foreign-exchange reserves). Putting this with the foreign-exchange loss gives a total profit for 2006 of 227 billion yuan, or $29 billion. Earnings of 343 billion against interest payments of 90 billion? That's an impressive spread for any investor!"

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