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China state banks sell US dollars to prop up yuan

Person, Man, Adult Reuters/Florence Lo
Policymakers said China will keep the yuan exchange rate basically stable at reasonable and balanced levels

China’s major state-owned banks were seen selling US dollars to buy yuan in both onshore and offshore spot markets in early Asian trade on Tuesday.

Insiders with direct knowledge of the matter said the sell-off was 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 can 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 onshore yuan strengthened more than 0.6 percent to a high of 7.1411 per dollar and was fetching 7.1541 as of 03:14 GMT. It is still down 3.5 percent 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.