Three informed sources on the activity of state-owned major banks in China stated that these banks were actively selling the dollar on Wednesday, leading to the stabilization of the yuan despite pressures in the currency trade amidst the ongoing economic turmoil. State-owned banks often operate on behalf of the People’s Bank of China in the foreign exchange market and can also trade on their own behalf or execute customer orders. The government’s banking measures come at a time when the yuan faces renewed selling pressure from foreign investors seeking to exit the sinking Chinese stock markets and the global resurgence of the US dollar.
With a 1% decline, the yuan is heading towards its largest monthly drop against the dollar in five months, and the CSI 300 leading stock index recorded a record loss for the sixth consecutive month on Wednesday. Investors feel pessimistic about growth prospects in China and frustrated by the lack of a comprehensive rescue plan for the real estate sector.
The bond market is the only bright spot, putting additional pressure on the yuan, as yields on Chinese government bonds for a 10-year term have dropped to their lowest levels in two decades amid expectations of further monetary easing to support the economy. The measures taken by government banks have effectively set a limit for the local yuan. Stocks in China and Hong Kong continued their declines on the last trading day of January, with the CSI300 index for leading stocks marking a sixth consecutive month of losses due to disappointing economic data and stimulus measures.
