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China secretly uses state banks to boost yuan’s value

TL;DR

  • China’s major state-owned banks have been buying yuan to support its value, leading to a 2% increase against the U.S. dollar in the past week.
  • This unexpected intervention, involving a mix of swaps and spot market activities, aims to boost the yuan amid a broadly weakening dollar.
  • The People’s Bank of China (PBOC) has also lowered the dollar-yuan daily fixing rate, indicating possible preparatory measures for future policy adjustments.

In a covert financial maneuver, China’s state-owned banks have been actively bolstering the value of the yuan, marking a strategic shift in the country’s currency management.

This week, these major banks have been purchasing yuan, contributing to its notable recovery against a broadly weakening U.S. dollar, according to sources familiar with the matter.

China’s Strategic Currency Interventions

The involvement of China’s big banks in the currency market isn’t a new phenomenon. Traditionally, they have been known to sell dollars in efforts to slow the yuan’s decline.

However, their recent activity in buying yuan while the currency was already on an upward trajectory has come as a surprise.

The yuan has seen a significant appreciation of about 2% in the past week, reaching its highest level in nearly four months, trading around 7.13 to the dollar.

These state banks, often acting as proxies for Chinese monetary authorities, have been engaging in a mix of swaps and spot market activities.

They’ve been observed exchanging yuan for dollars in the onshore swap market and then selling those dollars in the spot currency market.

This strategic maneuvering in the financial markets comes amidst a broader weakness of the dollar, with the dollar index retreating more than 3% in November.

The Broader Economic Play

This intervention by state banks is perceived as an attempt to accelerate the yuan’s gains and encourage exporters to convert more of their foreign exchange receipts into yuan.

Despite its recent rally, the yuan is still down more than 3% against the dollar this year. The selling of dollars by these banks has pushed the onshore spot yuan to its strongest position against the dollar in months, surpassing its daily official guidance.

The People’s Bank of China (PBOC) has also played a crucial role by lowering the dollar-yuan daily fixing rate this week, setting it at a 3-1/2-month low.

This move, according to analysts, appears to be preparatory work ahead of a potential policy rate cut. With the recovery of China’s economy still showing mixed signals, the need for more policy stimulus is evident.

However, further monetary easing could add downward pressure on the yuan, especially given the significant interest rate differential between China and other major economies, particularly the United States.

The PBOC’s recent actions, including injecting cash through its medium-term lending facility loans, have been carefully calibrated. While the rate on these loans has remained unchanged, the broader implications of these financial strategies are profound.

With the possibility of more policy easing, including potential cuts in the PBOC rate and reserve requirement ratio, analysts remain cautiously optimistic about the yuan’s outlook.

In essence, China’s discreet use of state banks to bolster the yuan’s value is a telling sign of the country’s evolving approach to currency management.

As the global economic landscape shifts, China’s strategic financial maneuvers not only impact its domestic markets but also reverberate across the international financial scene.

The coming months will be crucial in observing how these interventions play out and shape the yuan’s trajectory in the global currency markets.

Disclaimer: The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decision.

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Jai Hamid

Jai Hamid is a passionate writer with a keen interest in blockchain technology, the global economy, and literature. She dedicates most of her time to exploring the transformative potential of crypto and the dynamics of worldwide economic trends.

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