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China Tells State Banks To Sell Dollars And Buy Yuan

Derek Wolfe

Updated: September 30, 2022

imf lifted yuan's weighting
Editor’s Note:

EDITOR’S NOTE: The Chinese yuan just hit a 13-year low against the dollar this month; the worst currency crisis it's faced since 1994. Part of this has to do with the Fed whose hawkish rate hikes pushed up the dollar against most major currencies, sending them on a downward tailspin. So, in order for China to prop up its currency, it has to dump dollars and buy yuan. How much of its US reserves will it eventually sell? Nobody knows for sure. But we can assume it might be a sizeable chunk of what’s left in its foreign currency reserves. What’s important to note here is that de-dollarization just accelerated. And how this affects the value of the dollars you hold in your account is anybody’s guess. But you can bet that despite the dollar's current “strength” (and we place that world in scare quotes) it will likely not be favorable in the long run. It’s probably wise to begging hedging against the dollar drop by purchasing physical gold, as most central banks have already begun doing.

  • Reuters reported that China told state-owned banks to get ready to sell dollars and buy yuan in an effort to prop up the local currency
  • The move could stem the yuan's fall, as it remains on track for its largest annual loss against the dollar since 1994. 
  • A hawkish Fed has pushed the dollar to 20-year highs this year, pressuring currencies around the world. 

The People's Bank of China has told major state-run banks to prepare to shed dollar holdings while snapping up offshore yuan, which has continued to fall despite prior interventions, sources told Reuters.

The scale of this latest effort to prop up the yuan will be big and could provide a floor to the Chinese currency, according to the report.

The amount of dollars to be sold hasn't been decided yet, but Reuters said it will primarily involve the state banks' currency reserves. Their offshore branches, including those based in Hong Kong, New York and London, were ordered to review offshore yuan holdings and check to see that dollar reserves are ready. 

On Thursday, the yuan fell 0.9% to 7.1340 against the dollar and is on track for its worst annual decline since 1994, having lost more than 11% so far this year. Earlier this week, China's offshore yuan this week depreciated to a record-low against the greenback, and its domestic unit fell to its weakest level since the 2008 financial crisis.

The Federal Reserve's hawkish policy path has bolstered the dollar to 20-year highs this year, putting pressure on other central banks and triggering a "reverse currency war."

While a weaker currency can sometimes be beneficial, as it means exports get cheaper, the yuan's recent decline below the psychological threshold of 7-per-dollar has raised concerns. 

The People's Bank of China has consistently imposed a strong bias to its currency reference rate to help support the yuan. Central bank officials have also issued verbal warnings against speculating on the yuan and increased the cost of shorting the currency.

But it has refrained from raising benchmark rates and instead has been easing them in an effort to spark growth in an economy that's been dragged down by COVID-19 lockdowns, a real estate crash, and supply chain snags. 

Originally published on Business Insider.

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