Amidst a significant downturn in China’s stock markets, major state-owned banks in the country have swiftly moved to support the yuan. The measures include tightening liquidity in the offshore foreign exchange market and actively selling US dollars onshore, according to four sources with knowledge of the matter.
The primary objective behind these actions is to prevent the yuan from experiencing a rapid decline, especially as China’s A shares witnessed a substantial plunge. The benchmark Shanghai Composite index recorded its most significant one-day drop since April 2022 on Monday, falling 2.7%.
“It is a clear policy signal to stabilize the yuan and counter the negative market sentiment on equities,” remarked Gary Ng, senior economist for Asia Pacific at Natixis.
Investor confidence has been shaken by signs of an economic slowdown in the world’s second-largest economy, leading overseas funds to sell approximately $1.6 billion in Chinese equities so far this year.
In response to the market challenges, offshore yuan tomorrow-next forwards surged to a more than two-month high of 4.25 points late on Monday, reflecting signs of tighter liquidity conditions. Simultaneously, state banks in the offshore market reduced lending to their peers, effectively tightening up offshore yuan liquidity and increasing the cost of shorting the currency.
To further shield the yuan from rapid declines, state banks were actively selling dollars in the onshore spot foreign exchange market. The aggressive selling aimed to defend the 7.2 per dollar level, signaling a concerted effort to stabilize the currency.
All sources spoke on condition of anonymity due to restrictions on publicly discussing market conditions. State banks, while often acting on behalf of China’s central bank in the foreign exchange market, can also make trades on their own behalf or execute clients’ orders.
As of the latest figures, the onshore yuan traded at 7.1963 per dollar, reflecting a nearly 1.4% decline so far this year. Meanwhile, its offshore counterpart last fetched 7.2047.
