On Monday, China’s major state-owned banks took measures to support the yuan, tightening liquidity in the offshore foreign exchange market and actively selling U.S. dollars onshore.
The move responded to a significant drop in China’s A shares, particularly the benchmark Shanghai Composite index, which recorded its most substantial one-day decline since April 2022, falling 2.7%.
The primary objective was to prevent a rapid yuan depreciation as equities faced a negative market sentiment.
Overseas funds have been selling approximately $1.6 billion in Chinese equities this year, contributing to weakened investor confidence amid signs of an economic slowdown in China.
Offshore Yuan Forwards and Tightening Liquidity:
Tomorrow and going forward, offshore yuan saw a surge, reaching a more than two-month high of 4.25 points on Monday, indicating tighter liquidity conditions.
State banks in the offshore market reduced lending to their counterparts, increasing offshore yuan liquidity costs and making shorting the currency more expensive.
Simultaneously, state-owned banks aggressively sold dollars in the onshore spot foreign exchange market to prevent swift declines in the yuan. The defense of the 7.2 per dollar level was notable, reflecting the banks’ commitment to stabilizing the currency amid market volatility.
Yuan Performance and Market Dynamics:
As of the latest trading, the onshore yuan stood at 7.1963 per dollar, experiencing a nearly 1.4% decline since the beginning of the year. The offshore yuan was last quoted at 7.2047.
The coordinated efforts of state banks in the foreign exchange market are crucial to managing currency stability and mitigating the impact of market fluctuations.
State Banks’ Roles and Anonymity of Sources:
State-owned banks often act on behalf of China’s central bank in the foreign exchange market, serving multiple roles, including executing clients’ orders.
The sources provided information on the condition of anonymity due to restrictions on publicly discussing market conditions.
Analysts interpret the actions of state-owned banks as a clear policy signal aimed at stabilizing the yuan amid concerns about the equity market. The move reflects the Chinese authorities’ commitment to maintaining currency resilience in the face of external pressures and internal market dynamics.