China’s State-Owned Banks Actively Mop Up Offshore Yuan Amid Economic Concerns
SHANGHAI, August 21 (Reuters) – China’s major state-owned banks have been observed actively purchasing offshore yuan, according to three sources familiar with the matter. This move comes as the currency faces increasing pressure due to a darkening economic outlook and strain in the property sector.
State banks often act as agents for China’s central bank in the offshore foreign exchange market, but they can also trade on their own behalf or execute their clients’ orders.
The tightening of offshore yuan liquidity is expected to help stabilize the currency, one of the sources said.
This action effectively increases the cost of shorting the Chinese yuan at a time when the currency is already facing mounting depreciation pressure.
Following the state bank’s move, the offshore yuan rallied and was last trading at around 7.2834 per dollar, up approximately 0.3% for the day. The onshore yuan also strengthened, trading at around 7.28 per dollar.
So far this year, the yuan has weakened more than 5% against the U.S. dollar, reflecting growing concerns about the outlook for the world’s second-largest economy.
Earlier on Monday, China cut its one-year benchmark lending rate in an effort to stimulate credit demand. However, it surprised markets by keeping the five-year rate unchanged, causing concerns about the rapidly weakening currency.
“Probably China limited the size and scope of rate cuts because they are concerned about downward pressure on the RMB (renminbi),” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management.
“Chinese authorities care about currency market stability.”
In this month alone, the yuan has weakened almost 2% against the U.S. dollar.
According to the state bank sources, the cost of shorting the yuan has surged, as seen in sudden rises in offshore yuan tomorrow-next forward points.
Using FX swaps to increase the cost of shorting the currency has been a key tool used by authorities in the past to influence the yuan’s direction.
During London trade, offshore yuan forwards jumped across the board, indicating signs of yuan liquidity tightness. Several banking sources attributed the liquidity squeeze to the activity of the state-owned banks.
The one-month dollar/yuan forwards traded offshore reached the highest level in a year.
Sources revealed last week that China’s major state-owned banks were busy selling U.S. dollars to buy yuan in both onshore and offshore spot foreign exchange markets in an attempt to halt the rapid losses of the yuan.
“The PBOC (People’s Bank of China) has visibly stepped up its efforts to restrain the renminbi’s depreciation trend lately, but Beijing’s unwillingness to countenance more radical monetary and fiscal stimulus implies that the exchange rate will necessarily need to bear some of the burden of supporting the floundering economy through further depreciation,” said Alvin Tan, head of Asia FX at RBC Capital Markets.
Earlier on Monday, UBS cut its China 2023 real GDP growth forecast to 4.8% from 5.2%.
As long as uncertainty over Chinese efforts to shore up the economy persists, foreign investor sentiment towards China is likely to remain cautious, analysts cautioned.
(Reporting by Shanghai Newsroom; additional reporting by Kevin Buckland in Tokyo; editing by Ed Osmond and Angus MacSwan)
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