Chinese major state-owned banks were observed actively absorbing offshore yuan liquidity on Monday, as reported by three sources knowledgeable about the situation. This move had the effect of raising the expenses associated with shorting the Chinese currency.
While these state banks typically function as agents for China’s central bank in the offshore foreign exchange market, they also engage in trading on their own behalf or execute orders for clients.
The action of tightening offshore yuan liquidity may contribute to stabilizing the yuan, according to one of the sources.
As a result of this maneuver, the cost of shorting the yuan surged, as indicated by abrupt increases in offshore yuan tomorrow-next forward points.
Following the involvement of state banks, the offshore yuan managed to recover from its intraday low of 7.3360 against the dollar, trading at 7.3050 as of 0923 GMT. Simultaneously, the onshore yuan also rebounded from its initial loss, trading at 7.2996.
In the previous week, sources noted that China’s major state-owned banks were notably engaged in selling U.S. dollars to acquire yuan across both onshore and offshore spot foreign exchange markets. This strategic move was undertaken in an effort to counteract the rapid depreciation of the yuan.
