Chinese State-owned banks are aggressively buying the US dollar this week after the yuan hit a 14-month high. The USD was brought into the onshore spot market to control the rising yuan and slow down the currency’s bullishness.
However, unlike their previous strategy, traders did not recycle the US dollars into the swap market. The purchases were likely made to tighten dollar liquidity and contain the cost of long Chinese yuan bets. The development adds pressure on the yuan bulls who are holding the currency for the long term.
However, sources say that the US dollar purchases were meant to maintain a moderate pace of the rally and not to slow it down. It is reported that the State-owned banks acted on behalf of the People’s Bank of China (PBOC). State banks trade on behalf of the central bank, at times executing the orders for their clients.
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Massive US Dollar Purchases By Chinese Banks To Halt the Yuan’s Rally
The Chinese yuan has gained over 3.3% year-to-date against the US dollar. This is the biggest rise since the COVID-19 pandemic in 2020. Speculations are rife that the Chinese state-run banks purchased the US dollars to avoid yuan purchases by exporters and encourage global use of the currency.
The majority of the US dollar purchases by the Chinese banks came on Thursday, knocking it out of the 14-month high. The Chinese yuan is now at 7.07 per US dollar, weakening by over 0.1%. However, the PBOC has not released an official statement about ordering State-run banks to purchase the USD.
China has long been indulging in currency depreciation to protect its manufacturing, import, and export units. Trump has repeatedly called them out on their act during the campaign trial. China has always controlled the Chinese yuan’s rise against the US dollar to protect its self-interests.
