China's State Banks Eye Strategic Dollar-Yuan Swaps

According to two people with knowledge of the situation, China's biggest state-owned banks were observed on Tuesday exchanging dollars for yuan in the onshore swap market and then selling those dollars in the spot market to strengthen the yuan.

The central bank's moves coincide with the Chinese yuan's strongest month of the year, rising 2.55% against the US dollar in November. Still, it is down 3% so far this year.

According to the sources, the central bank's actions are intended to hasten the yuan's recovery and persuade domestic exporters to settle their foreign exchange gains in local currency by the end of the year.

In the foreign exchange market, Chinese state banks would trade both on their own behalf and as an agent of the nation's central bank.

Recent Transactions and Market Impact

Large banks were seen engaging in a similar transaction late last month, which supported the yuan's rebound against a generally declining US dollar.

According to two individuals, China's main state-owned banks have been active in the currency market this week, purchasing yuan to speed up its recovery against a generally lower US dollar.

Over the past year, the major banks-which occasionally function as the Chinese monetary authorities' representatives-have frequently sold dollars to halt the yuan's depreciation.

The sources, who requested to remain anonymous because they are not authorized to speak to the media on this subject, said that they were surprised by their continued yuan-buying activities this week even though the value of the currency was already rising.

The yuan has appreciated by 2% last month hitting a high of around 7.13 to the dollar, the highest level in over four months.

According to the sources, the state banks were observed trading dollars for yuan in the onshore swap market and selling those dollars in the spot currency market, seemingly continuing with their typical mix of swaps and spot market activities.

Their recent moves coincided with a general weakening of the dollar. The dollar index, which gauges the value of the currency relative to its main trade partners, has dropped by more than 3% in November as indications of a peak in the Federal Reserve's monetary tightening have affected U.S. rates.

According to some market players, state banks may be attempting to accelerate the yuan's rise and encourage exporters to exchange more of their foreign exchange revenues for yuan. This year, the value of the Chinese yuan has decreased by almost 3% in relation to the US dollar.

The onshore spot yuan temporarily reached 7.1296 per dollar due to state banks selling dollars, which was firmer than the daily official guideline for the first time in four months.