China's state banks drive yuan rally amidst dollar weakness: Report

China's major state-owned banks have actively participated in the currency market, buying the yuan and accelerating its rebound against a weakening US dollar, according to undisclosed sources cited by Reuters on Tuesday.

Traditionally involved in selling dollars to prevent the yuan's decline, the state banks' unexpected yuan-buying this week has contributed to a 2 per cent gain, placing the currency at approximately 7.13 to the dollar, its highest in nearly four months. Observers suggest the move aims to hasten the yuan's appreciation and encourage exporters to convert more foreign exchange receipts into yuan.

Market analysts speculate that the state banks employed their usual combination of swaps and spot market activity. They were observed exchanging yuan for dollars in the onshore swap market and subsequently selling those dollars in the spot currency market.

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The action coincided with a broader weakening of the US dollar, with the dollar index falling over 3 per cent in November due to diminishing US yields amid signs of a peak in Federal Reserve monetary tightening. Despite the recent gains, the Chinese currency is still down over 3 per cent against the dollar this year.

State banks' dollar-selling activities momentarily pushed the onshore spot yuan to 7.1296 per dollar, surpassing its daily official guidance for the first time in four months. The People's Bank of China (PBOC) has been consistently lowering the dollar-yuan daily fixing rate this week, setting it at a three-and-a-half month low of 7.1406 per dollar on Tuesday.

Analysts speculate that these actions might be in preparation for a potential policy rate cut, taking advantage of a favourable external environment to strengthen the Chinese yuan (CNY).

Reuters quoted Kiyong Seong, the lead Asia macro strategist at Societe Generale, who expressed astonishment at the continuous lowering of the fixing rate, suggesting it could be indicative of preparations for a policy rate cut.

While recent economic data revealedan uneven recovery in China, with positive surprises in industrial output and retail sales, concerns persist about the potential impact of further monetary easing on the Chinese currency.

The People's Bank of China has been injecting cash through medium-term lending facility loans but has kept the rate unchanged, prompting analysts to anticipate more policy easing in the future.

Zhi Xiaojia, chief China economist at Credit Agricole, acknowledged potential volatilities unless there are significant downside moves in the dollar or positive sentiment events.

She remains relatively constructive on the yuan's outlook into the end of the year and 2024, emphasising the wide yield gap and expectations of further policy easing, including potential rate and reserve requirement ratio cuts by the People's Bank of China.

(With inputs from Reuters)

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