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Suppose the PBOC buys a bunch of dollar-denominated bonds, using its dollar reserves. All else equal, what effect should this have on the yuan-USD exchange rate? And why? It amounts to trading non-interest-bearing foreign assets for interest-bearing ones, but I am having trouble seeing whether or why it might cause the yuan to depreciate.

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  • $\begingroup$ @1muflon1 I added a link to the article, but it is paywalled. Actually, the first paragraph of the question can be ignored for the purpose of an answer. $\endgroup$
    – rj7k8
    Feb 25 at 19:58
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    $\begingroup$ Buying bonds with existing reserves by itself does little. Presumably, the PBoC bought USD, and the USD is used to buy bonds. $\endgroup$ Feb 25 at 20:44
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Quote...

"Suppose the PBOC buys a bunch of dollar-denominated bonds, using its dollar reserves. All else equal, what effect should this have on the yuan-USD exchange rate?"

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" I am having trouble seeing whether or why it might cause the yuan to depreciate".

All else is not equal. To return to the original quantity of USD money held it will buy some USD from commercial banks, issuing renminbi in order to do so. Issuing renminbi will have the tendency to cause it to depreciate. The original quanity of USD money held could be minimal.

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  • $\begingroup$ Thank you for your answer. Regardless of what is the case in the real world, one could imagine that instead of buying USD from commercial banks, the central bank uses its reserves to buy US bonds. That was my hypothetical scenario. Based on the comment above it seems like this indeed should have little effect on the exchange rate. $\endgroup$
    – rj7k8
    Feb 25 at 23:47
  • $\begingroup$ What exactly did the article say? You can’t expect people to go through a paywall. The most likely explanation is that the article used “buying assets” as a shorthand for adding to reserves. $\endgroup$ Feb 25 at 23:58
  • $\begingroup$ @BrianRomanchuk I have edited my question to remove all reference to the article, and focus attention on my actual question. I agree that your explanation is the most likely one - thanks. $\endgroup$
    – rj7k8
    Feb 26 at 0:16
  • $\begingroup$ @rj7k8 I accepted the premise of your question that the PBOC bought dollar-denominated bonds using USD. $\endgroup$
    – H2ONaCl
    Feb 26 at 8:23
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    $\begingroup$ China holds its reserves almost entirely in the form of bonds and other financial assets, as it would otherwise end up with large credit exposures to banks. As such, it doesn’t have USD lying around (in significant size). As such, it cannot really increase its asset holdings from USD deposits. $\endgroup$ Feb 26 at 11:42

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