EXCLUSIVE: Chinese State Banks Seen Getting Dollars in Swap Market to Stabilize Yuan

SHANGHAI/BEIJING (Reuters) – Chinese state banks stepped up their intervention to defend a weaker yuan on Monday, banking sources told Reuters, as they sold large amounts of U.S. dollars and used a combination of swaps and spot deals.

Six banking sources told Reuters that the country’s major state-owned banks were seen swapping yuan for US dollars in the forward market and selling those dollars in the spot market, a move China used in 2018 and 2019 as well.

The sources, who have first-hand knowledge of market trading, said the sale appeared to be aimed at stabilizing the yuan, as swaps help buy dollars as well as stabilize the yuan in futures contracts.

The yuan has fallen 11.6% against the dollar this year. It was trading around 7.1980 per dollar on Monday.

One-year dollar/yuan futures fell rapidly after the State Bank’s actions, pushing the yuan to 6.95 against the dollar. One of the sources noted that the size of the dollar sale was “fairly huge”.

Another source said, “The big banks want to take positions in dollars from the swap market to stabilize the spot market.”

Government banks usually trade on behalf of the central bank in the foreign exchange market in China, but they can also trade for their own purposes or carry out orders for their corporate clients.

A third source pointed out that government banks’ trading appears to be managed so that the closely watched $3 trillion foreign exchange reserves are not being exploited for intervention.

At the same time, the move is helping government banks buy dollars at a time when rising US yields have made dollars scarce and expensive.

China burned $1 trillion in yuan-supporting reserves during the 2015 economic downturn, and the sharp drop in official reserves drew much criticism.

Reporting from the Shanghai and Beijing newsroom; Editing by Vidya Ranganathan and Anna Nicholas Da Costa

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