Inside China’s bold move to shield Yuan as stock markets plunge

China’s major state-owned banks have taken significant measures to defend the yuan amidst a slide in stock markets. Reports indicate that these banks, including the People’s Bank of China (PBOC), engaged in substantial selling of dollars in an effort to stabilize the yuan and prevent further depreciation. 

This strategic move is seen as a response to the recent downturn in the stock markets, a phenomenon likely influenced by concerns about the nation’s economic stability. The state bank intervention has effectively placed a floor under the onshore yuan, maintaining a level marginally lower than the previous trading day.

China’s mega banks in a high-stakes battle to defend Yuan 

China’s major state-owned banks were large sellers of dollars on Wednesday, according to an exclusive Reuters report, thereby stabilizing the yuan in currency trade amidst ongoing economic instability.

State banks frequently trade on the foreign exchange market on behalf of the People’s Bank of China. However, they may also implement client orders or engage in independent transactions.

A Reuters source remarked that the selling was extremely forceful in an effort to defend the yuan on the onshore spot market at approximately 7.1820 per dollar. All of the sources requested anonymity due to the prohibition on publicly discussing market conditions.

The state bank actions occur as the yuan is once again confronted with downward pressure from foreign investors fleeing China’s declining equity markets and a resurging U.S. dollar on a global scale.

The yuan is on the verge of its largest monthly decline against the dollar in five months, with a 1% decline, and on Wednesday, the blue-chip CSI 300 equity index recorded its sixth consecutive monthly loss.

Investors are pessimistic regarding China’s development prospects, worn thin by multiple years of underperformance and dissatisfied with the absence of a substantial rescue for the troubled real estate sector.

Aside from the bond market, which is exerting additional pressure on the yuan, the only positive spot is the bond market, as yields on 10-year Chinese government bonds fell to two-decade lows on expectations that additional monetary easing will be implemented to support the economy.

The action taken by the state bank effectively floored the onshore yuan, which was last valued at 7.1805 per dollar, a slight decrease from its close on Tuesday.

On the final trading day of January, both China’s and Hong Kong’s equities extended their declines, bringing them closer to a sixth consecutive losing month due to disappointing economic data and stimulus measures.

China pushes Yuan in Africa, reducing dollar reliance

The United States imports its debt all around the world, putting other countries at risk of hoarding the currency. The soaring US dollar is now causing anxiety in Africa since several countries are unable to service their debts. 

As the US dollar soars, African nations are forced to pay more for debt service, resulting in a deficit. A trade imbalance happens when a country imports more than it exports in a fiscal year. However, BRICS member China is taking advantage of the chance by pushing the Chinese Yuan ahead of the US dollar in Africa.

China is encouraging Africa to adopt local currencies, such as the Chinese yuan, rather than the US dollar. Africa stands to benefit from this circumstance because the Chinese yuan is less expensive for loan repayment than the US dollar. The development directly benefits BRICS, which initiated the de-dollarization process.

China began offering ‘Panda’ bonds to African states denominated in yuan. The move aids Africa’s debt repayment and may lead to a shift away from the US dollar in favor of the Chinese Yuan to preserve its interests.