China’s big state-owned banks have been active in the currency market this week, buying the yuan and helping accelerate its recovery against a broadly weaker U.S. dollar, two sources told Reuters on Tuesday.
The big banks, which sometimes act on behalf of China’s monetary authorities, have often sold dollars in the past year to slow the yuan’s decline.
Their continued yuan buying this week, when the currency was already rising, was a surprise to the sources, who spoke on condition of anonymity because they are not authorized to speak to the media about the matter.
The yuan has appreciated 2% in the past week to around 7.13 to the dollar, its highest level in nearly four months.
The sources said the state banks appeared to be following their usual combination of swap and spot market activity, and were seen exchanging yuan for dollars in the onshore swap market and selling those dollars in the spot currency market.
Their actions last week came amid broad dollar weakness. The dollar index, which measures the currency’s value against major trading partners, has fallen more than 3% in November as U.S. yields succumb to signs of a peak in Federal Reserve monetary tightening.
Some market participants said state banks may be trying to accelerate the yuan’s gains and encourage exporters to convert more of their foreign exchange receipts into yuan. The Chinese currency is still down more than 3% against the dollar this year.
Dollar selling by state banks briefly pushed the onshore spot yuan to 7.1296 per dollar, the first time in four months it has strengthened above the official daily guidance.
The People’s Bank of China (PBOC) also lowered the daily dollar-yuan fixing rate this week. On Tuesday, it set the midpoint at a 3-1/2-month low of 7.1406 per dollar.
“It’s surprising that they keep lowering the fixing at this rate. To me, it looks like they are preparing for a rate cut,” said Kiyong Seong, chief Asia macro strategist at Societe Generale (OTC:SCGLY). “When the external environment is favorable, they seem to be strengthening the CNY as much as possible.”
Recent data showed the recovery in the world’s second-largest economy remains uneven, with industrial production and retail sales surprising to the upside in October, while manufacturing activity and consumer prices continued to fall. While the economy still needs more policy stimulus, analysts say further monetary easing could put downward pressure on the Chinese currency, given the wide interest rate differential between China and other economies, particularly the United States.
The PBOC has been injecting cash into the banking system through its medium-term lending facility, but has recently kept the interest rate on these loans unchanged. “Some volatility around these levels could be likely at this point, unless there are further significant downside dollar moves or additional major sentiment positive events,” said Zhi Xiaojia, chief China economist at Credit Agricole (OTC:CRARY). “Indeed, the yield gap remains quite wide and we still expect further policy easing, including PBOC interest rate and reserve requirement ratio cuts.”