China’s major state-owned banks have been actively buying dollars in the onshore market this week and holding them rather than swapping them out, in what sources describe as an unusually forceful attempt to curb the yuan’s rapid appreciation. The purchases coincided with the yuan climbing to a 14-month high on Wednesday, continuing a pattern of state lenders stepping in to slow, but not reverse, the currency’s rise.
Unlike their typical practice, the banks did not channel the dollars back into the swap market, a move that traders say appears designed to tighten dollar liquidity and make long-yuan positions more expensive. As a result, back-end dollar/yuan swap points have fallen, deepening the negative carry of holding yuan, especially on the one-year tenor.
One source said the objective was simply to ease the pace of gains. Slower appreciation reduces incentives for investors, whose profits may no longer offset the interest-rate gap between the higher-yielding dollar and the lower-yielding yuan.
State banks often execute trades for the central bank but can also trade on their own accounts or for clients. The People’s Bank of China did not comment.
The yuan has strengthened about 3.3% against the dollar so far this year and is on track for its biggest annual rise since 2020. Authorities have supported the trend by setting the daily midpoint stronger than expected, though state banks have intervened to ensure the climb remains orderly and does not trigger abrupt exporter buying.
Dollar purchases on Thursday coincided with an unexpectedly weak midpoint fixing, pulling the yuan back from its recent peak to around 7.0694 per dollar, about 0.1% lower on the day.
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