Major Chinese banks have reportedly embarked on a significant selling spree of dollars this week in an effort to buy yuan and slow down the depreciation of the national currency. According to sources in the market, this offloading of dollars was observed in both onshore and offshore foreign exchange markets, with offshore units of the banks observed selling dollars during trading hours in London and New York.
This type of action is not uncommon, as Chinese banks often engage in currency trading for their own purposes or on behalf of clients. However, they also carry out such transactions upon the request of the country’s central bank, the People’s Bank of China (PBOC), when additional support is needed for the domestic currency. A Shanghai-based trader who wished to remain anonymous stated, “State bank dollar selling has become a new normal to slow the pace of yuan depreciation.” This suggests that the PBOC is actively involved in managing the exchange rate.
The offshore yuan has experienced a 6% depreciation against the US dollar this year and reached a nine-month low of around 7.35 to the greenback on Thursday. However, it showed slight signs of strengthening on Friday after the PBOC intervened by increasing the daily fixing, which is the midpoint rate around which the yuan is allowed to trade within a 2% band. By midday, the offshore yuan had risen to 7.28 against the US dollar, while its onshore counterpart also appreciated to trade at approximately 7.30 to the dollar.
Experts in the market attribute the weakening of the yuan’s exchange rate to several factors. One factor is the growing yield differential between China and the US, which recently reached its highest level in 16 years due to an interest rate cut by the Chinese regulator. Additionally, concerns among investors regarding China’s slow economic growth and the troubled property market, which constitutes a significant portion of China’s economy, have also contributed to the depreciation. Furthermore, there are fears regarding default risks in China’s shadow banking sector.
Switzerland-based hedge fund EDL Capital has predicted further weakening for China’s offshore yuan this week, stating that the currency’s depreciation could potentially become the next “black swan event” in the global market. This highlights the level of uncertainty surrounding the yuan’s trajectory and its potential implications for the global economy.
It is worth noting that the actions of Chinese banks in selling dollars to buy yuan reflect the efforts of the central bank to stabilize the exchange rate. Whether these measures will be successful in curbing the depreciation of the yuan remains to be seen. Nevertheless, this development adds another dimension to the ongoing discussions surrounding global currencies and their impact on economic stability.
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