The action was reportedly taken at the behest of the central bank and aimed at slowing down the yuan’s depreciation
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Major Chinese banks went on a dollar selling spree this week in order to buy yuan and slow the weakening of the national currency, Reuters reported on Thursday citing market sources.
According to the report, the offloading was spotted in both onshore and offshore foreign exchange markets, with offshore units of the banks seen selling dollars during London and New York trading hours.
An unnamed Shanghai-based trader told the news outlet that the action is not uncommon. Banks in China largely trade for their own purposes or on orders from clients. However, they are also known to do it upon request from the country’s central bank, the People’s Bank of China (PBOC), when it needs additional support for the domestic currency.
“State bank dollar selling has become a new normal to slow the pace of yuan depreciation,” the trader was cited as saying.
The offshore yuan has weakened about 6% against the US dollar so far this year, and dropped to a nine-month low of near 7.35 to the greenback on Thursday. However, it strengthened slightly on Friday after the PBOC intervened by hiking the daily fixing, the midpoint rate around which the yuan is allowed to trade in a 2% band. By midday, the offshore yuan rose to 7.28 against the greenback, while its onshore counterpart also grew to trade at roughly 7.30 to the dollar.
Market experts attribute the weakening in the yuan’s exchange rate to China’s growing yield differential with the US, which widened to its highest in 16 years this week after the Chinese regulator passed an interest rate cut. Growing investor worries over China’s slow economic growth, the country’s troubled property market, which accounts for a quarter of China’s economy, and default risks in its shadow banking sector also allegedly added momentum to the depreciation.
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Switzerland-based hedge fund EDL Capital forecast further weakening for China’s offshore yuan this week, saying that the currency’s depreciation could be the next “black swan event” on the global market.
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