Market Turbulence Triggers Proactive Yuan Support Measures from China
In response to recent market challenges, China’s state-owned banks executed strategic measures to reinforce the yuan’s stability. These initiatives involved a deliberate reduction in liquidity within the offshore foreign exchange market and active selling of U.S. dollars, a move aimed at counteracting the adverse effects of declining equities, as reported by reliable sources.
The urgency of these actions became apparent as China’s A shares experienced a substantial downturn, with the benchmark Shanghai Composite index plummeting by 2.7%. This marked the largest single-day drop since April 2022, prompting a concerted effort to prevent an excessively rapid depreciation of the yuan.
Gary Ng, Senior Economist for Asia Pacific at Natixis, highlighted the significance of this intervention as a clear policy signal. The objective was not only to stabilise the yuan but also to address the negative sentiment pervading the equities market. Ng emphasised the strategic nature of these measures, suggesting a proactive approach by Chinese authorities to maintain stability.
Amid this tumultuous market environment, global funds exhibited a lack of confidence in Chinese equities, divesting approximately $1.6 billion this year. The prevailing uncertainty, coupled with signs of an economic slowdown in the world’s second-largest economy, has contributed to this cautious approach from international investors.
The offshore yuan tomorrow-next forwards spiked to a more than two-month high of 4.25 points on Monday, reflecting tightened liquidity conditions in the market. This surge indicated an increased reluctance to lend among state banks operating in the offshore market, exacerbating liquidity constraints and raising the cost associated with shorting the yuan.
Further exacerbating the situation, state banks in the offshore market actively reduced lending to their counterparts, effectively constricting offshore yuan liquidity. This move not only heightened liquidity constraints but also increased the overall cost of shorting the currency, signalling a strategic effort to manage yuan depreciation.
Concurrently, state banks undertook assertive measures in the onshore spot foreign exchange market by actively selling dollars. The primary goal was to counteract the rapid depreciation of the yuan and defend the crucial 7.2 per dollar threshold. This proactive stance exemplified a concerted effort to maintain stability and control in the face of challenging market conditions.
Despite these strategic moves, sources providing this information requested anonymity due to regulatory constraints preventing the public discussion of market conditions. This adherence to confidentiality protocols underscores the sensitivity and importance of the financial information involved.
It’s important to note that state banks typically function on behalf of China’s central bank in the foreign exchange market. While their primary role is to act in the central bank’s interest, they may also engage in independent trading or execute orders on behalf of clients. As of the latest market data, the onshore yuan closed at 7.1963 per dollar, reflecting a 1.4% decline year-to-date. Meanwhile, its offshore counterpart settled at 7.2047. These figures provide a snapshot of the yuan’s performance amid the broader market dynamics.
