China's major state-owned banks moved to support the yuan on Monday, tightening liquidity in the offshore foreign exchange market while actively selling U.S. dollars onshore as equities slid, four sources with knowledge of the matter said.
The goal was to prevent the yuan from falling too fast as China's A shares plunged, said one of the people, with the benchmark Shanghai Composite index (.SSEC) posting its biggest one-day drop since April 2022 on Monday, down 2.7%.
"It is a clear policy signal to stabilise the yuan and counter the negative market sentiment on equities," said Gary Ng, senior economist for Asia Pacific at Natixis.
Overseas funds have sold roughly $1.6 billion in Chinese equities so far this year, with investor confidence bruised by signs of slowdown in the world's second largest economy.
Offshore yuan tomorrow-next forwards jumped to a more than two-month high of 4.25 points late on Monday, reflecting signs of tighter liquidity conditions.
The rise come as state banks in the offshore market curtailed lending to their peers, one of the sources said.
The move effectively tightened up offshore yuan liquidity and raised the cost of shorting the currency.
Meanwhile, the state banks were also selling dollars in the onshore spot foreign exchange market to prevent rapid yuan declines, three sources said.
Spot dollar selling became aggressive to defend the 7.2 per dollar level, one of them said.
All the sources spoke on condition of anonymity as they are not allowed to publicly discuss market conditions.
State banks often act on behalf of China's central bank in the foreign exchange market, but they could also trade on their own behalf or execute clients' orders.
The onshore yuan last traded at 7.1963 per dollar, down nearly 1.4% so far this year, while its offshore counterpart last fetched 7.2047.
