China’s major state-owned banks were seen busy selling U.S. dollars to buy yuan in both onshore and offshore spot foreign exchange markets this week, people with direct knowledge of the matter said, in an attempt to slow the yuan’s depreciation.
The yuan has lost about 2.4% against the dollar since this month, and 6% since the start of the year. The onshore yuan CNY=CFXS traded at 7.3145 per dollar as of 0442 GMT, while the offshore yuan CNH=D3 last fetched 7.3400.
The recent steepening in the yuan’s decline is a result of China’s widening yield differential with the U.S., and investors’ mounting concerns over China’s weak economic growth and rising default risks in its property and shadow banking sectors. CNY/
The government’s slow delivery of stimulus measures to bolster growth has disappointed investors. Meantime, the People’s Bank of China (PBOC) has eased monetary policy to support the economy, though the price paid for lowering interest rates is more pressure on the yuan.
This week, yield differentials between China and the U.S. widened to their highest in 16 years, as investors speculated that the PBOC would ease policy further after a surprise rate cut this week, even if it puts the yuan under more pressure.
Hong Kong’s overnight yuan borrowing costs HICNHONDF= jumped to the highest level since April 2022 on Wednesday, with the CNH Hong Kong Interbank Offered Rate benchmark (CNH HIBOR) rising across the board.
The liquidity squeeze was not very drastic as aggressively mopping up yuan liquidity from that market could adversely affect bond market sentiment, one banker noted.