Using derivatives for intervention had the benefit of delaying any decline in the PBOC's $3.5 trillion trove of foreign-exchange reserves, helping calm investors rattled by an economic slowdown and a slumping stock market. It was also faster as the monetary authority's managers didn't have to liquidate assets such as U.S. Treasuries to raise the dollars needed for direct yuan purchases.

The lack of a more detailed account of the PBOC's operations keeps investors guessing the extent of capital outflows and depreciation pressure. The authority has succeeded in containing the yuan selloff after unexpectedly devaluing the currency by 2.8 percent on Aug. 11 and 12.

The currency weakened to 6.45 per dollar on Aug. 12 before strengthening to 6.36 as of Tuesday in Shanghai, according to China Foreign Exchange Trade System prices.

The PBOC directed questions on forwards trading to its reserves-management arm, the State Administration of Foreign Exchange, which didn't reply to a fax seeking comment. Calls to the media offices of Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. — two of the nation's three largest banks — went unanswered. Forward contracts are agreements to buy or sell an asset at a specific price on a future date.

Gains in China's currency would be welcome, U.S. Treasury Secretary Jacob J. Lew said, adding that the world's second-largest economy must abide by commitments not to weaken the yuan.

The U.S. Treasury dropped its view that the yuan is “significantly undervalued” while saying that forces driving appreciation in the longer term remain and China needs to allow such strengthening eventually, according to a semi-annual report released Monday. It said China intervened “heavily” in the past three months, spending an estimated $229 billion to support the exchange rate.

China's reserves fell by $43.3 billion last month, half of the record $93.9 billion decline in August, and well below the record $120 billion decline in foreign-currency assets held by all Chinese financial institutions, including the PBOC. Historically, the numbers have broadly matched each other as policy makers buy or sell reserves to partially offset capital flowing in and out of the nation.

“The scale of decline in this data is significantly larger than that in PBOC's foreign-exchange reserves and its foreign assets, suggesting that banks have resorted to their own spot foreign-exchange positions to help absorb outflow pressure,” MK Tang, a senior economist at Goldman Sachs in Hong Kong, wrote in a research report.

Swap Market

Major Chinese banks borrowed dollars in the onshore swap market in late August and September, and then undertook “heavy dollar selling” in the spot market, said Frank Zhang, head of foreign-exchange trading at Shenzhen-based China Merchants Bank.

The PBOC then came in to offset, or “square”, the positions with the banks, essentially taking on their trades onto its own balance sheet, according to Goldman Sachs.

China, which owns one-third of the world's $11.3 trillion of foreign-exchange holdings, isn't alone in ramping up the use of derivatives to prop up currencies against the dollar.

As the rout in emerging assets spread across Asia, central banks from South Korea, Singapore, India, Philippines, Malaysia and Thailand increased the use of forwards to $22.5 billion in August, compared with $6.5 billion the month before, according to official data calculated by Goldman Sachs.

The PBOC doesn't report its financial instruments to the International Monetary Fund. Hiding its footprints in the financial market may just be a convenient side effect of using the derivatives market.

On a practical level, buying yuan forwards means the PBOC wouldn't drain yuan liquidity out of the system as it would otherwise by buying its own currency in the spot market. Policy makers cut interest rates and the reserve-requirement ratio in August, partly to replenish the funds drained during intervention.

“If you have a transaction that settles down the road, the actual liquidity impact in the short term may not be as dramatic,” said Citigroup's Englander. “Down the road you can't avoid it.”

Selling dollars in the forward market may be more effective in reversing bearish yuan trades that global investors put on at a time of risk aversion, according to Jose Wynne, head of foreign-exchange research at Barclays Plc.

Instead of rushing for the exits, some foreign investors may stay put and buy dollar contracts to cover their yuan exposure, he said. China's benchmark 10-year sovereign yield has dropped about 0.4 percentage point to 3.1 percent since the Aug. 11 devaluation, rewarding those who held their nerve.

“The central bank shouldn't be selling spot, because international investors aren't looking to sell their bonds and take their dollars back home,” Wynne said.

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