China’s prominent state-owned banks have significantly increased their acquisition of the yuan, driving its value higher against a weakening U.S. dollar. This shift in strategy diverges from the previous trend, where these institutions primarily sold dollars to mitigate the yuan’s decline.
Yuan’s Steady Surge and Banking Tactics
In recent weeks, the yuan has surged by a substantial 2%, hitting a nearly four-month peak at approximately 7.13 against the dollar. The surprising factor lies in the continued buying spree of these banks, even as the yuan was already on an upward trajectory.
The state banks’ strategy involves a combination of swaps and spot market activities, exchanging yuan for dollars in the onshore swap market and subsequently selling those dollars in the spot currency market.
Moreover, this aggressive stance by Chinese state banks coincides with a period of general dollar weakness. The dollar index, measuring against major trading currencies, has dipped by over 3% in November. This decline is largely attributed to expectations of a Federal Reserve slowdown in monetary tightening, influenced by U.S. yields responding to economic signals.
Implications and Potential Motivations
Analysts speculate that this maneuver by Chinese banks aims to accelerate the yuan’s appreciation, potentially encouraging exporters to convert a larger portion of their foreign exchange earnings into yuan. Despite recent gains, the yuan remains down by over 3% against the dollar this year.
Additionally, the intervention has been impactful enough to briefly surpass the daily official guidance rate, a first in four months. The People’s Bank of China (PBOC) has also set the daily fixing rate at a 3-1/2-month low, hinting at a possible policy rate cut.
PBOC’s Monetary Actions Amid Economic Indications
The Chinese economy, the second-largest globally, displays a mixed recovery, positive signs in industrial output and retail sales contrast with declining manufacturing activity along with consumer prices, signaling the need for sustained policy support.
Yet, further monetary easing might exert downward pressure on the yuan, given the substantial interest rate gap between China and other major economies, particularly the United States.
However, despite uncertainties, the PBOC continues to inject cash into the banking system through stable medium-term lending facility loans. Analysts also cautiously anticipate the yuan’s trajectory for the remainder of the year and heading into 2024.