China’s state banks seen mopping up offshore yuan liquidity

SHANGHAI (Reuters) – China’s major state-owned banks were seen actively mopping up liquidity on Monday, three people with knowledge of the matter said, a move that raised the cost of shorting the Chinese currency.

State banks often act as agents for China’s central bank in the offshore foreign exchange market, but they could also trade on their own behalf or execute their clients’ orders.

Tightening up offshore yuan liquidity could also act to stabilise the yuan, said one of the sources.

The move effectively raised the cost of shorting the Chinese yuan,at a time the local unit is facing mounting depreciation pressure.

The cost of shorting the yuan jumped, the sources said, as seen from sudden rises in offshore yuan tomorrow-next forward points.

Following the state bank move, the offshore yuan pared some losses from its intraday low of 7.3360 per dollar to 7.3050 as of 0923 GMT, while its also gave up some of its earlier loss to trade at 7.2996.

China’s major state-owned banks were seen busy selling U.S. dollars to buy yuan in both onshore and offshore spot foreign exchange markets last week, sources told Reuters, in an attempt to arrest the yuan’s rapid losses.