China's major state-owned banks took decisive measures on Monday to prop up the yuan amidst a tumultuous market scenario, as revealed by insider sources. In response to a sharp decline in China's A shares, notably marked by the Shanghai Composite index's largest one-day drop since April 2022 (down 2.7%), these banks adopted strategies to prevent the yuan from experiencing a rapid depreciation.
One insider emphasized that the primary objective was to counter the negative market sentiment surrounding equities. Gary Ng, senior economist for Asia Pacific at Natixis, characterized this move as a clear policy signal aimed at stabilizing the yuan as reported by Reuters.
The context was further exacerbated by overseas funds offloading approximately $1.6 billion in Chinese equities in the early part of the year, reflecting a dent in investor confidence fueled by signs of an economic slowdown in the world's second-largest economy.
A notable development was observed in the offshore foreign exchange market, where state banks actively intervened to tighten liquidity. Offshore yuan tomorrow-next forwards surged to a more than two-month high of 4.25 points on Monday, indicating heightened signs of liquidity tightening.
This surge was attributed to state banks in the offshore market scaling back lending to their counterparts, effectively raising the cost of shorting the yuan.
Concurrently, state banks engaged in concerted efforts to stabilize the yuan's value by selling U.S. dollars in the onshore spot foreign exchange market. The sources revealed that this selling was particularly aggressive around the 7.2 per dollar level, indicating a strong commitment to preventing rapid declines in the yuan.
These actions underscore the multifaceted approach taken by China's state-owned banks to address both offshore liquidity concerns and onshore currency depreciation.
It is noteworthy that state banks, often acting as agents of China's central bank in the foreign exchange market, wield significant influence. While their primary role is to implement monetary policy on behalf of the central bank, they can also engage in trading activities for their own benefit or execute orders on behalf of clients.
As of the latest available data, the onshore yuan concluded its trading session at 7.1963 per dollar, reflecting a year-to-date depreciation of nearly 1.4%. Its offshore counterpart, on the other hand, settled at 7.2047 per dollar.
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