- Chinese state-owned banks have increased purchases of the US dollar to moderate the yuan’s strong gains.
- These dollar acquisitions were aimed at reducing dollar liquidity and managing the cost of bullish yuan positions.
- The yuan strengthened more than 3.3% year-to-date, marking its largest rise since 2020.
- Purchases occurred mainly on Thursday, pushing the yuan down to about 7.07 per US dollar, weakening by 0.1%.
- The People’s Bank of China (PBOC) has not officially confirmed directing these dollar purchases.
Chinese state-owned banks have made substantial purchases of the US dollar this week following the yuan reaching a 14-month high. The transactions were executed within the onshore spot market to manage the yuan’s rapid appreciation.
Unlike previous interventions, the US dollars bought were not recycled into swap markets. Instead, the purchases appear intended to tighten US dollar liquidity and control the costs associated with long yuan bets. These actions add pressure on investors holding bullish positions on the currency.
Sources indicate these dollar acquisitions were designed to sustain a moderate rate of yuan appreciation rather than to halt it completely. The transactions were carried out by state-owned banks acting on behalf of the People’s Bank of China (PBOC). These banks often trade at the behest of the central bank, sometimes executing orders for its clients.
The yuan has risen over 3.3% against the US dollar since the start of the year, marking the largest annual gain since 2020 during the COVID-19 pandemic. Speculation suggests state banks purchased US dollars to deter exporters from acquiring yuan and to encourage broader international use of the currency.
Most of the US dollar purchases took place on Thursday, driving the yuan off its 14-month peak. The yuan currently trades near 7.07 units per US dollar, representing a decline of over 0.1%. The PBOC has yet to issue an official statement regarding any directive given to state banks about these purchases.
Historically, China has managed its currency to support domestic manufacturing and trade interests. This approach includes deliberate currency depreciation to maintain competitive export conditions and protect economic sectors. Past US administrations have criticized China’s currency management practices, emphasizing its strategic control of the yuan’s value against the US dollar.
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