FT Alphaghettios - Here's where that Chinese dollar liquidity went, idiots. Apparently the PBoC have been explaining themselves on the internet:
In short, the FX seems to have gone to Chinese banks to help them manage their FX risk in a more flexible two-way trading environment, and also to help them manage their asset-liabilities balances and effective foreign currency liquidity.
[...] the sales represent the substitution of who owns FX assets in China, not some sort of distressed plugging of a capital or budgetary hole.
Where government hands once invested foreign claims on behalf of the people — in a custodial manner — private hands are now being given the opportunity to make these choices directly, something which is drawing down government managed dollar liquidity and substituting it for privately managed dollar liquidity.
You really have to ask how dumb you have to be to think the PBoC was puking USD into the market to prop up the yuan, but then they suddenly allowed it to drop 3% in a couple days, and now they'll follow that by puking a hundred billion more USD next month to prop it up again.
After all, China probably has about 30,000 Western-trained economics Ph.D.s, in addition of course to the thousands of Chinese spies with econ Ph.D.s working for the US government: you really think that none of them have read about the 1997 Asian financial crisis, and how it's literally impossible to support a currency once the speculators get their teeth in?