China’s Currency Policy in Focus as State Banks Sell Dollars

China’s central state-owned banks were seen busy selling U.S. dollars to buy yuan in both onshore and offshore spot foreign exchange markets this week, people with direct knowledge of the matter said. The move was in an attempt to slow the yuan’s depreciation. Though state banks often trade on their behalf or execute clients’ orders, they act at the behest of the central bank when the yuan is under pressure, as it is now.

State banks were selling yuan to buy dollars in London, and New York trading hours, one source with direct knowledge of market trades told Reuters. The sell-off was intended to stabilize the yuan in onshore and offshore spot markets, which are mainly separate, to prevent the yuan from deviating too far from its onshore midpoint.

The yuan fell to a low of 6.7709 per dollar in early trade on Monday morning after the central bank’s daily fixing was much weaker than traders expected. The yuan was also weaker against the Japanese yen and the euro.

In a sign of the PBOC’s renewed intervention efforts, the country’s central state-owned banks were spotted swapping yuan for dollars in the forwards market and then selling those dollars in the spot market. This was a familiar playbook for the PBOC, which used the same strategy in 2018 and 2019. The swaps helped procure dollars and anchor the price of the yuan in forwards, while the spot sales could limit declines in the offshore yuan.

According to two sources with direct knowledge of the situation, offshore branches of Chinese state-owned banks were also selling dollars in this week’s London and New York trading hours. These dollar sales could help limit the offshore yuan’s declines and keep it from diverging too far from its onshore counterpart.

Traders say the yuan’s recent decline is being fuelled by investors fearing that Beijing will introduce further stimulus measures to ward off an economic slowdown. China’s economic data in recent weeks has been tepid, raising worries about the impact of slowing domestic demand and rising trade friction with the United States.

The yuan has fallen about 2.4% against the greenback this month and about 6% since the start of the year. The yuan’s slide is exacerbated by China being a net exporter of goods and services, meaning its currency needs to be weaker to help its economy.

Last week, Fan Gang, a PBOC’s monetary policy committee member, told media that China should allow the yuan to weaken gradually. However, most traders believe the PBOC will continue intervening aggressively if the currency remains under pressure. China burned through a massive chunk of its official reserves in 2015 and is trying to avoid a repeat of that episode. This is why the yuan has been under such intense pressure this year. As a result, many investors are skeptical about the yuan’s outlook for the rest of the year.

Stay connected with us. Subscribe to our Newsletter Now!

Share is proud to feature the talented contributions of our esteemed authors. With a deep passion for technology, innovation, and the ever-evolving landscape of Silicon Valley, we bring a wealth of knowledge and insights to our readers. Our extensive experience and understanding of the industry allow them to dissect complex topics and translate them into engaging, accessible content.


And get notified everytime we publish a new blog post.