Chinese state-owned banks are selling the yuan in the spot market and offsetting their trades with swaps, putting the brakes on a recent rise in the currency.
The lenders have been ramping up their purchases of spot dollars over the past few months and offering large amounts of dollars for yuan in the currency swap market, according to traders who asked not to be identified as they’re not authorized to speak publicly.
Although the two positions should ultimately balance each other out, the strategy is seen by traders as a negative for the yuan since it front-loads selling pressure.
It reverses a previous strategy used by banks for much of the past two years, when lenders were mostly borrowing dollars via swaps while simultaneously buying the yuan in the spot market — a combination that helped lift the Chinese currency. It wasn’t immediately clear what prompted the banks to sell dollars in the swaps market.
The onshore yuan was little changed at around 7.11 per dollar on Tuesday, data compiled by Bloomberg showed.
Traders said banks’ shifting strategies are behind the narrowing of the discount traders earn for taking a future dollar-yuan position versus taking one today, a calculation known as the trade’s swap points. Onshore 12-month swap points now stand at their least negative since 2022, according to Bloomberg-compiled data, showing that forward dollar positions have become more expensive.
Swap points in the onshore yuan market have also climbed above those offshore in the past few weeks, with the gap between the two reaching its most positive since 2013, according to Bloomberg data. That is another sign of the demand for dollars in the onshore market.
The onshore yuan rose to its strongest level since November last week and has traded sideways in recent sessions. While a firmer currency helps lift investor confidence toward Chinese assets and raises purchasing power for consumers, it also risks reducing the nation’s export competitiveness.
State banks’ trading in swaps “could either be an unwinding of previous sell-buy swap positions, or efforts to curb overly rapid yuan appreciation,” said Becky Liu, head of China macro strategy at Standard Chartered Plc.
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