© Reuters. In this illustration taken on March 10, 2023, Chinese yuan and US dollar bills are seen. REUTERS/Dado Ruvic/Illustration/File photo
SHANGHAI (Reuters) – China’s major state-owned banks were seen exchanging yuan for U.S. dollars in the domestic swaps market and selling those dollars in spot currency markets this week, two sources told Reuters on Tuesday.
The yuan gained 2% last week to around 7.13 per dollar – its highest level in almost four months – and large state banks have continued selling dollars for yuan this week, the sources said. .
Both sources spoke on condition of anonymity because they were not authorized to speak to the media about the matter.
State banks are often suspected of intervening in the currency market on behalf of authorities, but the timing is unusual as they typically sold dollars when the yuan was under pressure to depreciate.
His action last week came amid broad dollar weakness. The , which measures the value of the currency against its main trading partners, has retreated more than 3% in November, as US yields succumb to signs of a spike in the Federal Reserve’s monetary tightening.
Some market participants said state banks may be trying to accelerate the yuan’s gains and encourage exporters to convert more of their foreign exchange earnings into yuan. The Chinese currency has still lost more than 3% against the dollar this year.
Dollar selling by state banks caused the domestic spot yuan to briefly hit 7.1296 per dollar, firmer than its official daily guidance for the first time in four months.
The People’s Bank of China (PBOC) has also been reducing the daily fixing exchange rate of the dollar against the yuan this week. On Tuesday it set the midpoint at a three-and-a-half-month low of 7.1406 per dollar.
“It’s surprising to see them continuing to lower the peg at this pace. To me, it looks like they are doing preparatory work before a policy rate cut,” said Kiyong Seong, chief Asia macro strategist at Societe Generale (OTC:). “When the external environment is favorable, they seem to strengthen the yuan as much as possible.” Recent data shows that the recovery in the world’s second-largest economy remains uneven and bumpy: Industrial production and retail sales surprised to the upside in October, while manufacturing activity and consumer prices continued to decline. While the economy still needs more policy stimulus, analysts say further monetary easing could add downward pressure on the Chinese currency, given the wide differential between interest rates in China and other economies, particularly the United States.
The People’s Bank of China has been injecting cash through its medium-term lending (MLF) into the banking system, but has lately kept the rate on those loans unchanged. “Some volatilities around this level could be likely at this time, unless there are further significant dollar bearish moves or additional positive developments in sentiment,” said Zhi Xiaojia, chief China economist at Credit Agricole (OTC:). “Indeed, the yield gap remains quite wide, and we still expect further policy easing, including a cut in the People’s Bank of China rate and reserve requirement ratio (RRR).”
Zhi said she was “relatively constructive” on the yuan through the end of the year and 2024.