Major state-owned banks in China have reportedly taken an active role in the currency market by buying the yuan, contributing to its rebound against a weakening US dollar, as per undisclosed sources cited by Reuters on Tuesday.
Traditionally engaged in selling dollars to prevent the yuan’s decline, the unexpected move by state banks this week has led to a 2% gain, positioning the currency at approximately 7.13 to the dollar, its highest in almost four months. Analysts believe the intention is to expedite the yuan’s appreciation and encourage exporters to convert more foreign exchange receipts into yuan.
Market analysts speculate that state banks employed their usual combination of swaps and spot market activity. They were observed exchanging yuan for dollars in the onshore swap market and subsequently selling those dollars in the spot currency market.
This action aligns with a broader weakening of the US dollar, with the dollar index falling over 3% in November due to diminishing US yields amid signs of a peak in Federal Reserve monetary tightening. Despite recent gains, the Chinese currency is still down over 3% against the dollar this year.
State banks’ dollar-selling activities briefly pushed the onshore spot yuan to 7.1296 per dollar, exceeding its daily official guidance for the first time in four months. The People’s Bank of China (PBOC) has consistently lowered the dollar-yuan daily fixing rate this week, setting it at a three-and-a-half month low of 7.1406 per dollar on Tuesday.
Analysts speculate that these actions might be in preparation for a potential policy rate cut, taking advantage of a favorable external environment to strengthen the Chinese yuan (CNY).
Kiyong Seong, the lead Asia macro strategist at Societe Generale, expressed astonishment at the continuous lowering of the fixing rate, suggesting it could be indicative of preparations for a policy rate cut.
While recent economic data revealed an uneven recovery in China, with positive surprises in industrial output and retail sales, concerns persist about the potential impact of further monetary easing on the Chinese currency.
The People’s Bank of China has been injecting cash through medium-term lending facility loans but has kept the rate unchanged, leading analysts to anticipate more policy easing in the future.
Zhi Xiaojia, chief China economist at Credit Agricole, acknowledged potential volatilities unless there are significant downside moves in the dollar or positive sentiment events. She remains relatively constructive on the yuan’s outlook into the end of the year and 2024, emphasizing the wide yield gap and expectations of further policy easing, including potential rate and reserve requirement ratio cuts by the People’s Bank of China.
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