SHANGHAI, Aug 21 (Reuters) – China’s major state-owned banks were observed actively absorbing the offshore yuan on Monday, according to three individuals familiar with the matter. This comes as the currency faces increasing pressure due to a deteriorating economic outlook and strain in the property sector. State banks often act as agents for China’s central bank in the offshore foreign exchange market, but they can also trade on their own behalf or execute their clients’ orders. Tightening offshore yuan liquidity could help stabilize the currency, one of the sources noted. The move effectively increased the cost of shorting the Chinese yuan, at a time when the local unit is experiencing mounting depreciation pressure. Following the state bank’s action, the offshore yuan rallied and was last traded at around 7.2834 per dollar, up approximately 0.3% for the day. The onshore yuan also strengthened to around 7.28 per dollar. So far this year, the yuan has weakened by over 5% against the greenback, reflecting growing concerns about the outlook for the world’s second-largest economy. Earlier on Monday, China reduced its one-year benchmark lending rate as authorities aim to stimulate credit demand. However, they surprised markets by keeping the five-year rate unchanged, raising broader concerns about a rapidly weakening currency. “Probably China limited the size and scope of rate cuts because they are concerned about downward pressure on the RMB (renminbi),” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management. “Chinese authorities care about currency market stability.” In this month alone, the yuan has weakened by almost 2% against the greenback. The state bank sources informed Reuters that the cost of shorting the yuan surged, as evidenced by sudden increases in offshore yuan tomorrow-next forward points. Using FX swaps to raise the cost of shorting the currency is the primary tool authorities have employed in the past to influence the yuan’s direction. During London trade, offshore yuan forwards rose across the board due to signs of yuan liquidity tightness, with several banking sources attributing the liquidity squeeze to the banks’ activity. The one-month dollar/yuan forwards traded offshore reached the highest level in a year. Last week, sources told Reuters that China’s major state-owned banks were busy selling U.S. dollars to buy yuan in both onshore and offshore spot foreign exchange markets, in an attempt to halt the yuan’s rapid losses. “The PBOC (People’s Bank of China) has visibly stepped up its efforts to restrain the renminbi’s depreciation trend lately, but Beijing’s unwillingness to consider more radical monetary and fiscal stimulus implies that the exchange rate will inevitably need to bear some of the burden of supporting the floundering economy through further depreciation,” noted Alvin Tan, head of Asia FX at RBC Capital Markets, in a statement. Earlier on Monday, UBS lowered its China 2023 real GDP growth forecast from 5.2% to 4.8%. As long as uncertainty over the direction of Chinese…
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