Beijing's decision to continue supporting the yuan after a sharp one-off devaluation has investors wondering how long the government can hold the line as the country burns through its currency reserves at record rates.
For traders and corporate treasurers, the question is how and whether to deal with their yuan positions.
Data released Monday showed that Chinese banks' foreign currency sales jumped to a record 723.8 billion yuan ($113.66 billion) in August, by far the largest monthly figure on record. Foreign currency reserves fell by $94 billion, also a record.
Analysts say the figures were heavily boosted by state bank interventions in the currency markets to support the yuan, both onshore and off.
The central bank has also published new rules requiring banks dealing in onshore yuan forwards to hold additional dollar reserves, and was suspected of intervening in forex derivative markets. On September 10, the offshore yuan jumped by 1.2 percent against the dollar in late afternoon trade,in a move widely attributed to massive purchases by offshore Chinese banks.
Chinese regulators have said there is no problem; the yuan has found a more rational equilibrium, outflows aren't really a problem, and if the US decides to lift interest rates, the impact will be containable.
Not everyone believes authorities will succeed in stamping out further depreciation pressure.
"I don't think they can do it," said a European investment manager, who spoke on condition of anonymity. He was worried that Chinese corporates and individuals would begin converting their yuan to dollars at a rapid rate.
Investors know the reserves are not infinite, and they know that constant meddling runs counter to other policy goals such as opening the capital account and increasing the yuan's use in trade.
If Beijing stops holding the line, investors are worried about getting caught short, and that concern is prompting them to keep hedging even as the central bank tries to persuade them it's unnecessary.
While new trading rules have successfully curbed the 600 percent spike in currency forward volumes in late August following the devaluation, volumes for onshore outright forward contracts are still double where they were in late July.
"The central bank set reserve ratios to 20 percent of the nominal value of forwards and swap contracts," said a trader at a foreign bank in Shanghai.
"But actually this step will not increase the cost so much for clients. Considering the spot price, they are still keen on buying forex and swap contracts to migitate the risk."
"Given the big gap between on and offshore markets, the cost of holding reserve deposits could be well covered," added a trader at a foreign bank in Hong Kong.
Traders themselves also remain skeptical that the downward pressure on the yuan has abated, even after the offshore intervention.
"I don't think it will change expectations on the depreciation of the yuan," said a trader at an Asia commercial bank in Hong Kong.
"To some extent, the depreciation pressure on the offshore yuan is now transferred to the onshore market," said a NDF trader at a foreign bank in Shanghai.
"We think that the yuan now will depreciate steadily."
Some analysts believe if the PBOC keeps intervening in the currency markets at the current rate, China's forex reserves could be consumed as quickly as two years.
A person with ties to the People's Bank of China (PBOC) estimated that since mid-August the central bank has spent around $200 billion in the onshore and offshore currency markets to keep the yuan from depreciating further.
"Before they announced this reform (devaluation) they had a credible peg to the dollar and they hardly needed to intervene in the markets, but now they are having to spend huge amounts just to achieve the same effect," the person said.
"It's like they decided to cross the river because it looked nice and calm but then they slipped and got dragged downstream, and now they are having to use all their strength to get back to the shallow water that they were in before."
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