China’s state banks are rampantly hoarding US dollars as yuan hits 14‑month high

China’s largest state-run banks spent this week aggressively buying US dollars in the onshore market, and then didn’t do a thing with them.

This of course comes as the yuan surged to a 14-month high on Wednesday, and these banks always try to slow the currency’s rally without triggering a total reversal using… the US dollar, as ironic as it may seem.

These state lenders usually push the dollars into the swap market, but this time they just held on tight. The goal here folks, is to make it more expensive to hold long yuan positions by tightening access to dollars.

State banks refuse to swap dollars, pressure yuan bulls

FX markets reacted as back-end dollar/yuan swap points dropped sharply, a glaring code for a deeper negative carry, meaning if you’re holding yuan long-term, your yield sucks compared to dollars.

The one-year tenor had just hit a one-month high last week, and now it’s slumping again. Sorry to you. But hey this doesn’t mean the yuan’s going into a nosedive, though it did weaken slightly to 7.072 per dollar after Reuters first broke the news.

But again, to be fair, the yuan had already taken a hit earlier that morning, when the People’s Bank of China (PBOC) announced that it has fixed the trading band way lower than expected, setting it at 7.0733, a massive 164 pips away from the average estimate in a Bloomberg survey. That’s the widest weak-side gap since February 2022, and it shook the market.

The fixing matters because it caps how far the onshore yuan can move, just 2% in either direction.

Yuan gains show economic shift since Trump-era trade war

The fact that the yuan’s even rallying this much shows how far China has come since the 2018-2019 trade war. Back then, the economy was chained to US demand. Now? Not so much.

Exports have moved toward the Global South, and China has expanded its chokehold on key global supply chains, especially in rare earths, thanks to the gift that is President Donald Trump.

But let’s not get carried away. On a trade-weighted basis, the yuan still doesn’t look that hot, so even with the recent spike, the real effective exchange rate (REER), which adjusts for inflation, is near its lowest point since 2011, according to data from the Bank for International Settlements.

Year-to-date, the yuan is up about by 3.3% against the dollar, and it’s now pacing for its biggest yearly gain since 2020, the pandemic chaos year from hell.