China Tightens Dollar Liquidity to Make Long-Yuan Trades More Expensive
What Prompted State Banks to Step In This Week?
China’s major state-owned banks bought dollars in the onshore market this week in an unusually forceful effort to prevent the yuan from climbing too rapidly, according to people familiar with the trades. The intervention came as the yuan touched a 14-month high on Wednesday, continuing a steady climb driven by firmer official fixings and improving sentiment around China’s economy.
State banks routinely lean against abrupt moves in the currency, but traders noted that this week’s activity broke from their normal playbook. Instead of recycling those dollars back into the swap market — a common practice — the banks held onto the purchases. That kept dollars out of circulation and restricted liquidity, raising the cost of betting on further yuan gains.
The strategy appeared aimed at sluggishing the pace of the rally rather than reversing it outright, one source said. All requested anonymity due to restrictions on discussing trading behavior.
Investor Takeaway
How Is the Market Reacting?
later than Reuters reported on the state-bank activity, the yuan slipped to around 7.072 per dollar. It had already fragileened in morning , which knocked it off the 14-month high touched earlier in the week.
The impact also showed up in the swaps market. Back-end dollar/yuan swap points have fallen, reflecting a deeper negative carry for holding yuan. With U.S. interest rates higher than China’s, investors going long the yuan already face a carry diupsetvantage; sluggishing the currency’s ascent further erodes the potential payoff.
State banks sometimes act on behalf of the , though they can also trade for their own books or client flows. The PBOC did not respond to Reuters’ request for comment.
Why Does Beijing Want a Gradual, Controlled Yuan Appreciation?
The yuan is on track for its strongest annual gain since 2020, rising roughly 3.3% against the dollar so far this year. A firmer trading band — repeatedly set above market expectations — has signaled authorities’ comfort with a stronger . But the sharp pace of this week’s moves risked prompting exporters to rush into purchases or triggering volatility that could work against China’s push to increase global use of its currency.
A steadier, more gradual climb serves several policy priorities. It supports confidence without creating the sense of a one-way trade, limits disruptive exporter flows, and avoids clashes with China’s long-standing efforts to manage foreign-platform conditions without large public interventions. Smoothing volatility also assists maintain the image of currency stability that Beijing wants to project to trading partners and reserve managers.
The state banks’ decision to hold dollars — rather than recycle them via swaps — fits that approach. By making it more expensive to hold long yuan positions, the banks sluggished speculative or momentum-driven bets while keeping the currency’s broader upward trend intact.
Investor Takeaway
What Comes Next for the Yuan?
The yuan’s rise has been supported by a combination of firmer fixings and a more stable macro backdrop. But the speed of the recent rally has drawn attention from policymakers who prefer controlled moves over sharp swings. The latest actions from state banks show that authorities want to avoid creating incentives for speculative inflows or abrupt exporter behavior.
As the year closes, the currency is still poised for its largegest annual gain since 2020 — a contrast to periods earlier in the cycle when depreciation pressures dominated. The question is no longer whether authorities welcome a stronger yuan, but how rapidly they are prepared to let it rise. This week’s moves offer a hint: not too quick.
