State-Owned Chinese Banks Dive Into Forex Markets to Slow Yuan's Depreciation

• Financial

China's major state-owned banks have reportedly made significant moves in the foreign exchange markets in the past week, selling substantial amounts of U.S. dollars to purchase yuan. This strategic maneuver, observed in both onshore and offshore spot foreign exchange markets, aims to mitigate the ongoing depreciation of the yuan, according to individuals with direct insight into these transactions.

State banks, while they also conduct trades for their clients or for their own portfolios, frequently step in under the directive of the central bank, especially when the yuan faces downward pressure. "State bank dollar selling has become a new normal to slow the pace of yuan depreciation," a Shanghai-based trader remarked, shedding light on the evolving financial landscape.

Global Activity Echoes Beijing's Concerns

Interestingly, this isn't just a localized phenomenon. Offshore branches of these state-owned banks were spotted trading dollars during peak hours in London and New York just this week, as confirmed by two independent sources.

The rationale behind such aggressive dollar selling is twofold. Firstly, it restricts further depreciation of the offshore yuan. Secondly, it ensures that the offshore yuan doesn't deviate significantly from its onshore equivalent, thereby maintaining a semblance of parity and stability.

To put things in perspective, the yuan has been on a downward trajectory for a while now. It has slipped approximately 2.4% against the dollar this month alone and has faced a decline of about 6% since the beginning of the year.

Current trading figures pin the onshore yuan at 7.3145 per dollar, whereas its offshore counterpart stands slightly weaker at 7.3400. Analysts have attributed this precipitous fall to a combination of factors. China's growing yield gap with the U.S.

has certainly played a part, but perhaps more worryingly, the market reflects a growing anxiety among investors. Concerns abound regarding China's lukewarm economic growth and the increasing default risks shadowing its property and shadow banking sectors.

While China's foray into the forex markets may offer a temporary respite to the declining yuan, the underlying economic and financial concerns remain an area that Beijing needs to address for long-term stability and growth.