China's state-owned banks rally to stabilise yuan amid stock market turmoil
Published: Jan 23, 2024, 05:29 IST | Updated: Jan 23, 2024, 05:29 IST
A China yuan note is seen in this illustration photo May 31, 2017.
China's major state-owned banks took decisive action on Monday to shore up the yuan, tightening liquidity in the offshore foreign exchange market and actively selling US dollars onshore as domestic equities experienced a significant downturn.
This is based on a Reuters report.
With the benchmark Shanghai Composite index marking its largest one-day drop since April 2022, falling by 2.7 per cent, the move aimed to prevent the yuan from depreciating too rapidly, signalling a clear policy effort to stabilise the currency amid negative market sentiment on equities.
"It is a clear policy signal to stabilise the yuan and counter the negative market sentiment on equities," Reuters quoted Gary Ng, Senior Economist for Asia Pacific at Natixis as saying. The aggressive support measures come at a time when overseas funds have offloaded around $1.6 billion in Chinese equities this year, reflecting waning investor confidence amid signs of an economic slowdown in the world's second-largest economy.
In response to the market dynamics, offshore yuan tomorrow-next forwards surged to a more than two-month high of 4.25 points, indicating a tightening of liquidity conditions. State-owned banks in the offshore market curtailed lending to their peers, further intensifying liquidity constraints and increasing the cost of shorting the currency.
Concurrently, in a bid to prevent swift declines in the yuan, state banks were actively selling dollars in the onshore spot foreign exchange market, with a focus on defending the 7.2 per dollar level.
The sources, speaking on the condition of anonymity due to market regulations, highlighted the crucial role of state banks, which often act on behalf of China's central bank in the foreign exchange market. While their primary mission is to stabilise the yuan, they may also engage in trading on their own behalf or execute clients' orders. The onshore yuan concluded trading at 7.1963 per dollar, reflecting a nearly 1.4 per cent decline year-to-date, while its offshore counterpart settled at 7.2047.
(With inputs from Reuters)