<p>It turns out they simply loan to various other domestic banks, and those banks enact policy on behalf of the PBOC. Naturally the domestic banks have a bit less freedom than we would expect as compared to western institutions.</p>
<p>Sources:</p>
<p><a href="https://www.youtube.com/watch?v=54-YmBGMSyY" rel="nofollow noreferrer">https://www.youtube.com/watch?v=54-YmBGMSyY</a></p>
<p><a href="https://thechinaproject.com/2023/06/29/shadow-reserves-how-china-hides-trillions-of-dollars-of-hard-currency/" rel="nofollow noreferrer">https://thechinaproject.com/2023/06/29/shadow-reserves-how-china-hides-trillions-of-dollars-of-hard-currency/</a></p>

CC BY-SA 4.0
2024-06-14T05:17:57.180Z
2024-06-14T05:17:57.180Z
Sea Erchin
<p>Assets are fungible, &quot;at the margin&quot; so to speak, so it doesn't make any difference whether the asset is a foreign currency amount or a loan to a bank.</p>

CC BY-SA 4.0
2024-06-14T05:20:08.847Z
This answer never sat well with me because those banks could simply buy Yuan with the loans and undermine the peg. It turns out the banks just enact the policy on behalf of the PBOC. I've posted an answer with sources.
Sea Erchin
CC BY-SA 4.0
2024-06-18T03:51:27.233Z
A bank isn't going to accept a presumably yuan loan from the PBOC in order to buy yuan. Think about it.
H2ONaCl
CC BY-SA 4.0
2024-06-25T12:53:56.493Z
Right. As mentioned in the sources they're FX denominated (probably USD) loans.
Sea Erchin
CC BY-SA 4.0
2024-04-16T04:03:29.313Z
2024-04-16T04:03:29.313Z
H2ONaCl
<p>As a central bank, if you want to keep your currency low you can just keep buying foreign currencies (which is selling your own currency) to satisfy all the demand for your currency and prevent appreciation. China has had this policy for decades, first with a hard peg and then with a soft peg. <a href="https://www.soonparted.co/p/pboc-standing-bid" rel="nofollow noreferrer">Looking at the PBOC balance sheet over the years</a>, you can see a natural accumulation of FX reserves gained from this process. Except for the fact that around 2015, they shifted their assets out of FX and into loans. China still maintains a soft peg, the PBOC balance sheet is still expanding, and other indicators suggest the Yuan would be appreciating if they weren't doing something to peg it lower.</p>
<p>My question is, how can the PBOC peg it just by lending and without buying FX? Are these simply loans collateralised against FX?</p>

<central-banking><foreign-exchange><currency-peg>
How does China maintain the soft peg?
Sea Erchin
# How does China maintain the soft peg?

(Asked by: username_0 on 2024-04-15)

As a central bank, if you want to keep your currency low you can just keep buying foreign currencies (which is selling your own currency) to satisfy all the demand for your currency and prevent appreciation. China has had this policy for decades, first with a hard peg and then with a soft peg. [Looking at the PBOC balance sheet over the years](https://www.soonparted.co/p/pboc-standing-bid), you can see a natural accumulation of FX reserves gained from this process. Except for the fact that around 2015, they shifted their assets out of FX and into loans. China still maintains a soft peg, the PBOC balance sheet is still expanding, and other indicators suggest the Yuan would be appreciating if they weren't doing something to peg it lower.

My question is, how can the PBOC peg it just by lending and without buying FX? Are these simply loans collateralised against FX?

**Tags:** central-banking, foreign-exchange, currency-peg


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## 2 answers

### Answer by username_0 on 2024-06-14. Score: 0 | Accepted answer

It turns out they simply loan to various other domestic banks, and those banks enact policy on behalf of the PBOC. Naturally the domestic banks have a bit less freedom than we would expect as compared to western institutions.

Sources:

<https://www.youtube.com/watch?v=54-YmBGMSyY>

<https://thechinaproject.com/2023/06/29/shadow-reserves-how-china-hides-trillions-of-dollars-of-hard-currency/>


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### Answer by username_1 on 2024-04-16. Score: 0

Assets are fungible, "at the margin" so to speak, so it doesn't make any difference whether the asset is a foreign currency amount or a loan to a bank.

> **Comments:**
> **username_0**: This answer never sat well with me because those banks could simply buy Yuan with the loans and undermine the peg. It turns out the banks just enact the policy on behalf of the PBOC. I've posted an answer with sources.  
> **username_1**: A bank isn't going to accept a presumably yuan loan from the PBOC in order to buy yuan. Think about it.  
> **username_0**: Right. As mentioned in the sources they're FX denominated (probably USD) loans.  

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