China State Banks to Initiate Dollar-to-Yuan Conversion in London and New York

In an effort to stop the yuan’s devaluation, China state banks were reportedly busy this week selling US dollars to buy yuan in both onshore and offshore spot foreign exchange markets.

State banks frequently act at the direction of the central bank when the yuan is under pressure, as it is right now, even though they also trade on their own behalf or to carry out clients’ instructions.

To limit the rate of yuan depreciation, state bank dollar sales have become the new norm.

Two sources with intimate knowledge of the situation claimed on Thursday that offshore offices of the state banks were also observed selling dollars during London and New York trading hours this week.

By selling dollars, the offshore yuan might be restrained from falling and kept from deviating too far from its onshore equivalent. Since this month, the yuan has fallen by around 2.4% and by 6% since the year’s beginning. As of 04:42 GMT, the onshore yuan was trading at 7.3145 per dollar, while the offshore yuan last sold for 7.3400.

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Disappointment Over Government’s GDP-Boosting Measures

The increasing yield disparity between China and the US, as well as investors’ growing worries about China’s sluggish economic development and rising default risks in its real estate and shadow banking sectors, are to blame for the recent sharpening of the yuan’s slide.

Investors have been let down by the government’s delayed implementation of stimulus measures to boost GDP. The People’s Bank of China (PBOC) has loosened monetary policy in the meanwhile to assist the economy, but the cost of doing so is increasing pressure on the yuan.

With investors speculating that the PBOC might soften policy further after this week’s unexpected rate cut, even as it puts the yuan under additional pressure, yield differentials between China and the US this week extended to their widest in 16 years.

Market observers claim that the Chinese government has been trying to stop the yuan’s drop in recent weeks by continually establishing a stronger-than-expected fixing and selling dollars via state banks.

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Source: finance.yahoo.com