Chinese State Banks Busy Selling U.S. Dollars to Stabilize Yuan
In an attempt to slow the depreciation of the yuan, Chinese state banks were observed selling U.S. dollars and buying yuan, according to Reuters. The move comes after the onshore yuan reached a 16-year low against the U.S. dollar earlier this week.
The People’s Bank of China (PBOC) set the yuan midpoint at 7.2006 against the U.S. dollar on Friday, which is more than 1,000 basis points stronger than Reuters’ estimate. This is the second consecutive day that the fixing rate has exceeded the expectations, and it marks four consecutive days that the midpoint has been around 900 basis points stronger than forecasted.
The onshore yuan, which is traded in mainland China, strengthened 0.1% against the U.S. dollar, while the offshore yuan, traded in markets like Hong Kong and Singapore, weakened slightly. The yuan midpoint acts as a reference point for trading and sets the trading range between +2% and -2%. This means that the yuan is allowed to trade 2% above or below the fixing rate each day.
Vishnu Varathan, head of economics and strategy for Asia and Oceania at Mizuho Bank, highlighted the heightened risks of intervention for the onshore yuan due to China’s slowing growth and financial risks. He believes that the onshore yuan may face challenges in the medium term, stating that “fraught geopolitics amid economic gloom and financial risks may durably stress the CNY.”
Reuters also reported that Chinese state banks were seen selling U.S. dollars and buying yuan in both onshore and offshore spot foreign exchange markets this week. This type of intervention typically slows down the depreciation of the yuan.
The PBOC, in its second quarter monetary policy implementation report, emphasized its commitment to maintaining reasonable and sufficient liquidity and supporting the country’s economic recovery. The central bank stated that foreign exchange settlement and sales for the renminbi (another name for the yuan) were rational and orderly, and market expectations were stable. It vowed to maintain the basic stability of the yuan exchange rate at a reasonable and balanced level and prevent the risk of exchange rate overshoot.
Unlike other major currencies such as the U.S. dollar or the Japanese yen, China maintains strict control over the onshore yuan, setting a daily midpoint fix based on the previous day’s closing level. The currency is allowed to trade within a narrow band above or below the day’s midpoint rate, and the central bank intervenes when necessary to limit volatility.