EXCLUSIVE – Chinese state banks witnessed dollar-to-yuan selling in London and New York for hours

SHANGHAI (Reuters) – Major Chinese state-owned banks have been seen busy selling U.S. dollars to buy yuan on onshore and offshore spot foreign exchange markets this week, people with direct knowledge of the matter said, in a bid to slow the yuan’s depreciation.

Although they also trade on their own behalf or to fulfill customer orders, country banks often act at the behest of the central bank when the yuan is under stress, as it is now.

“Selling dollars from state banks has become the new normal to slow down the yuan’s depreciation,” said a Shanghai-based trader.

Two sources familiar with the matter said on Thursday that overseas branches of the country’s banks were seen selling dollars during trading hours in London and New York this week.

Selling the dollar could limit this decline in the offshore yuan and prevent it from diverging too far from its onshore counterpart.

The yuan has lost about 2.4 percent against the dollar since this month, and 6 percent since the beginning of the year. The local yuan was trading at 7.3145 against the dollar as of 0442 GMT, while the offshore yuan was last quoted at 7.3400.

The recent decline in the yuan is a result of China’s widening yield differential with the US, growing investor concerns about weak economic growth in China and increasing default risks in the real estate and shadow banking sectors. (CNY/)

The government’s slowness in implementing stimulus measures to support growth has disappointed investors. Meanwhile, the People’s Bank of China (PBOC) has been easing monetary policy to support the economy, though the price paid for lower interest rates is more pressure on the yuan.

This week, yield spreads between China and the United States widened to their highest levels in 16 years, as investors speculated that the People’s Bank of China (PBOC) would ease policy further after a surprise rate cut this week, even if it put the yuan under more pressure.

Over recent weeks, market watchers say, Chinese authorities have sought to slow the yuan’s decline, with the People’s Bank of China (PBOC) insisting on stronger-than-expected reform and state banks repeatedly selling dollars.

A similar tactic was seen in September 2022, when the People’s Bank of China (PBOC) also told major state-owned banks to prepare to sell dollars for yuan in overseas markets as it tries to stem the yuan’s decline.

In July, the central bank modified a coefficient to allow businesses to borrow more from abroad, so they can bring in foreign currency to transfer inward, thus supporting the yuan. But the high interest rates charged on foreign loans remain a deterrent to borrowing from abroad, which undermines the effect of the policy adjustment.

Traders said one tactic that appeared to be working was an offer by state banks to lend less yuan in Hong Kong’s offshore market, where tight liquidity helped limit the yuan’s decline this week.

Overnight borrowing costs in Hong Kong in yuan jumped to their highest level since April 2022 on Wednesday, with the CNH Hong Kong Interbank Offered Rate (CNH HIBOR) surging across the board.

One of the bankers pointed out that the liquidity crisis was not very severe, as aggressively removing yuan liquidity from that market could negatively affect the sentiment of the bond market.

(Reporting by Shanghai Newsroom; Editing by Jacqueline Wong and Simon Cameron-Moore)

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