China state banks seen selling US dollars to prop up yuan -sources

© Reuters. FILE PHOTO: Coins and banknotes of China’s yuan are seen in this illustration picture taken February 24, 2022. REUTERS/Florence Lo/Illustration/File Photo/File Photo

SHANGHAI/BEIJING (Reuters) -China’s major state-owned banks were seen selling U.S. dollars to buy yuan in both onshore and offshore spot markets in early Asian trade on Tuesday, three people with direct knowledge of the matter said, moves aimed at supporting the Chinese currency.

China’s state banks usually trade on behalf of the central bank in the country’s foreign exchange market, but they could also trade on their own behalf.

The dollar sales come after China’s top leaders pledged on Monday to step up policy support for the economy amid a tortuous post-COVID-19 recovery, focusing on boosting domestic demand and signalling more stimulus steps.

Policymakers also said China will keep the yuan exchange rate basically stable at reasonable and balanced levels, and vowed to invigorate the capital market and restore investor confidence.

“It is interesting that the Politburo mentioned FX stability in the statement, for the first time in recent years,” analysts at HSBC said in a note.

“This means that smoothing yuan depreciation pressure may become more of a policy priority from now on. This is in line with the People’s Bank of China’s (PBOC) further tightening of FX policy recently.”

China’s monetary authorities have ramped up efforts recently to defend a weakening currency. Last week, regulators relaxed rules to allow companies to borrow more overseas while the PBOC has been persistently setting daily midpoint guidance rate firmer than market projections.

The strengthened more than 0.6% to a high of 7.1411 per dollar and was fetching 7.1541 as of 0314 GMT. It is still down 3.5% against the greenback so far this year – one of the worst performing Asian currencies.

Its offshore counterpart followed the strengthening trend and surged to a week high of 7.1475 before being last traded at 7.1542.

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