China Tells Its Banks to Gear up for Massive Dollar Dump, Yuan Buying Spree

China Tells Its Banks to Gear up for Massive Dollar Dump, Yuan Buying Spree

The People’s Bank of China has told central state-run banks to prepare to divest dollar holdings while snapping up offshore yuan, which has resumed to plunge despite earlier interventions, sources informed Reuters.

According to the report, the scale of this latest effort to prop up the yuan will be significant and could provide a floor to the Chinese currency.

The number of dollars sold hasn’t been decided yet, but Reuters said it would primarily involve the state banks’ currency reserves. Their offshore branches, including those based in Hong Kong, New York, and London, were ordered to review offshore yuan holdings and check to see that dollar reserves are ready.

On Thursday, the yuan fell 0.9% to 7.1340 against the dollar and is on track for its worst annual decline since 1994, having lost more than 11% this year. Earlier this week, China’s offshore yuan depreciated to a record low against the greenback, and its domestic unit fell to its weakest level since the 2008 financial crisis.

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The Federal Reserve’s hawkish policy path has bolstered the dollar to 20-year highs this year, putting pressure on other central banks and triggering a “reverse currency war.”

While a weaker currency can sometimes be beneficial, as it means exports get cheaper, the yuan’s recent decline below the psychological threshold of 7-per-dollar has raised concerns.

The People’s Bank of China has consistently imposed a strong bias on its currency reference rate to help support the yuan. Central bank officials have also issued verbal warnings against speculating on the yuan and increased the cost of shorting the currency.

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But it has refrained from raising benchmark rates and instead has been easing them to spark growth in an economy dragged down by COVID-19 lockdowns, a real estate crash, and supply chain snags.

Source

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