China state banks seen busy with FX swaps, pressing swap points to negative
2022.05.10 16:36
FILE PHOTO: Chinese yuan banknote is displayed on U.S. Dollar banknotes in this illustration taken, February 14, 2022. REUTERS/Dado Ruvic/Illustration
SHANGHAI (Reuters) -China’s major state-owned banks were actively swapping yuan for dollars in the onshore forwards market on Tuesday, five banking sources said, pressuring swap points into negative territory for the first time in more than three years.
The swaps exacerbated dollar liquidity tensions as U.S. yields rose rapidly and the yield gap between the world’s two largest economies effectively vanished.
The sources with knowledge of the matter told Reuters that state banks were seen swapping yuan for dollars in the onshore forwards market, leaving one-year dollar/yuan swap points to a low of -51 points, the lowest level since March 2019.
Buy-sell swaps help to reduce the supply of dollars that the market can access to short-sell the yuan.
State banks usually trade on behalf of the central bank in China’s FX market but they can also trade on their own behalf or execute orders for their corporate clients.
One of the sources noted that the cost of accessing dollar funding by overseas Chinese banks had been rising rapidly, and using FX swaps to obtain dollars had become rather “cost-effective”.
State lenders used such tactics frequently in 2019 to support the Chinese currency, which faced mounting depreciation pressure due to heightened bilateral trade tensions with the United States.
This time around, the yuan regained some downside pressure, with the onshore yuan losing about 5.5% of its value against the dollar this year to trade at an 18-month low as of Tuesday.
