Major Chinese state banks defend yuan against sinking equity markets and resurging US dollar
State-owned banks in China were reportedly heavy sellers of dollars on Wednesday, working to stabilize the yuan as it faced downward pressure due to the country’s struggling economy. Although state banks typically act on behalf of the central bank in the foreign exchange market, they also have the ability to trade on their own or execute orders for clients. Sources with direct knowledge of the situation described the selling as “very forceful,” as the banks aimed to defend the yuan at around 7.1820 per dollar in the onshore spot market.
Foreigners’ retreat from China’s sinking equity markets and the strengthening US dollar are contributing to renewed downside pressure on the yuan. The currency is currently on track for its largest monthly drop against the dollar in five months, while the blue-chip CSI 300 equity index has recorded a record sixth consecutive monthly loss. Investors are feeling pessimistic about China’s growth prospects, dissatisfied with the lack of a substantial rescue plan for the struggling property sector, and fatigued by years of underperformance.
Amidst this bleak outlook, the bond market seems to be the only bright spot, which is further exacerbating the pressure on the yuan. China’s 10-year government bond yields have reached two-decade lows due to expectations of additional monetary easing to support the economy. The actions taken by the state banks have effectively established a floor under the onshore yuan, which is currently trading at 7.1805 per dollar, slightly lower than the previous day’s close.
At the end of January, both China and Hong Kong stocks experienced further declines, with the blue-chip CSI300 Index recording its sixth consecutive losing month. Disappointing economic data and stimulus measures have contributed to this downward trend.
It is important to note that the information in this story has been corrected to provide accurate details regarding the stock index milestone.
Analyst comment
Negative news: Major Chinese state banks defend yuan against sinking equity markets and resurging US dollar
As an analyst, I predict that the market will remain under pressure as investors continue to retreat from China’s sinking equity markets and the US dollar strengthens. The bond market may provide some support, but overall, the outlook remains bleak due to pessimism about China’s growth prospects and the lack of a substantial rescue plan for the struggling property sector. The actions taken by the state banks will temporarily stabilize the yuan but may not be enough to reverse the downward trend.
