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Exclusive: Major China state banks seen swapping dollars for yuan in forwards market - traders

·2-min read
FILE PHOTO: FILE PHOTO: Illustration picture showing U.S. dollar and China's yuan banknotes
FILE PHOTO: FILE PHOTO: Illustration picture showing U.S. dollar and China's yuan banknotes

SHANGHAI (Reuters) - China's major state-owned banks have been swapping U.S. dollars for yuan this week, traders said on Thursday, suggesting monetary authorities are trying to rein in the sharply appreciating currency.

Those operations in the onshore currency swap market have caused the value of the yuan to fall in the forwards market, dampening expectations for it to appreciate further and simultaneously making it more expensive for investors to borrow yuan.

Two traders told Reuters they saw big state banks buying dollars in the onshore spot market during late night trading sessions to effectively prevent the yuan from strengthening too fast.

The yuan has appreciated 7% to the dollar since the depths it hit in May, as China's rapid recovery from the coronavirus pandemic and high-yielding markets draw foreign investor inflows.

Traders took these state bank actions as an official sign that the authorities might not want the Chinese currency to strengthen too much in a short period of time, hurting exports.

"The swap market actions, along with recent policy moves, were all meant slow down the pace of yuan appreciation," said one of the traders.

The swaps by the big state banks drove up the one-year premium on dollars to as high as 1,700 points this week, implying a 2.5% decline over the next 12 months in the tightly managed yuan.

State banks usually act on behalf of the central bank in the country's foreign exchange market, but they could also trade on their own behalf.

The People's Bank of China (PBOC) has taken other measures recently to ease the pace of appreciation.

It lowered the reserve requirement ratio for financial institutions when conducting some foreign exchange forwards trading to zero earlier this month..

Earlier this week, the PBOC's currency trading system suspended a counter-cyclical factor that local banks had been using to massage the value of the yuan’s daily mid-point, effectively removing another tool routinely used to prevent depreciation.

(Editing by Kim Coghill)