Daily Management Review

During London And New York Business Hours, China's State Banks Were Observed Exchanging Dollars For Yuan: Reuters


During London And New York Business Hours, China's State Banks Were Observed Exchanging Dollars For Yuan: Reuters
In an effort to stop the yuan's depreciation, China's big state-owned banks were reportedly busy this week selling U.S. dollars to buy yuan in both onshore and offshore spot foreign exchange markets.
State banks frequently act at the direction of the central bank when the yuan is under pressure, as it is right now, even though they also trade on their own behalf or to carry out clients' instructions.
"State bank dollar selling has become a new normal to slow the pace of yuan depreciation," said one Shanghai-based trader.
Two sources with intimate knowledge of the situation claimed on Thursday that offshore offices of the state banks were also observed selling dollars during London and New York trading hours this week.
By selling dollars, the offshore yuan might be restrained from falling and kept from deviating too far from its onshore equivalent.
Since this month, the yuan has fallen by around 2.4% and by 6% since the year's beginning. As of 04:42 GMT, the onshore yuan was trading at 7.3145 per dollar, while the offshore yuan last sold for 7.3400.
The increasing yield disparity between China and the US, as well as investors' growing worries about China's sluggish economic development and rising default risks in its real estate and shadow banking sectors, are to blame for the recent sharpening of the yuan's slide.
Investors have been let down by the government's delayed implementation of stimulus measures to boost GDP. The People's Bank of China (PBOC) has loosened monetary policy in the interim to boost the economy, but doing so has increased pressure on the yuan.
With investors speculating that the PBOC might soften policy further after a surprise rate cut this week, even as it puts the yuan under further pressure, yield differentials between China and the U.S. extended to their widest in 16 years this week.
Market observers claim that the Chinese government has been trying to stop the yuan's drop in recent weeks by continually establishing a stronger-than-expected fixing and selling dollars via state banks.
The PBOC used a similar strategy in September 2022 when it urged big state-owned banks to be ready to exchange dollars for yuan in foreign markets in an effort to stop the yuan's decline.
The central bank changed a parameter in July to permit businesses to borrow more money abroad. This allowed them to bring in foreign currency to be exchanged onshore, strengthening the yuan. However, the increased interest rates levied on international loans continue to discourage foreign borrowing, weakening the effectiveness of that policy change.
State banks reportedly proposing to lend less yuan in the offshore Hong Kong market appears to have been a successful strategy since the lack of liquidity there helped to restrain the yuan's drop this week, according to dealers.
The benchmark CNH Hong Kong Interbank Offered Rate (CNH HIBOR) increased across the board on Wednesday, pushing Hong Kong's overnight yuan borrowing costs to their highest level since April 2022.
Since forcefully removing yuan liquidity from that market could have a negative impact on bond market sentiment, the liquidity crunch was not as severe as it might have been.