China’s State-owned Banks to Dump Dollars and Purchase Yuan

China’s central bank has asked major state-owned banks to prepare for reducing their dollar holdings while snapping up offshore Yuan, sources said on September 29th. The move is aimed at stemming Yuan’s dip.

 State-owned banks have been told to ask their offshore branches, including those based in Hong Kong, New York and London, to review their holdings of offshore Yuan and ensure their U.S. dollar reserves are ready to be deployed. According to sources, the scale of this round of dollar selling will be rather considerable, but the total amount of dollar dumping is yet to be determined as the trend of Yuan depends heavily on the strength of the dollar and the Fed’s tightening trajectory.

 The simultaneous selling of dollars and buying of Yuan could put a floor under the Chinese currency, which has lost more than 11% of its market value to the dollar so far this year and may set for its biggest annual loss since 1994.

 While the yuan’s depreciation has been gradual and mainly related to the decline in major currencies against a dollar buoyed by aggressive Federal Reserve monetary tightening, its decline to the weaker side of 7-per-dollar has sparked concerns about domestic sentiment and potential capital outflows. Offshore Yuan moves in lock-step with the onshore unit, but its trading volumes account for about 70% of all the global Yuan trades.