The Chinese ordered state-owned banks to prepare for a massive dollar sell-off and yuan purchases. The Chinese want the yuan to strengthen against the dollar. It will increase the pressure on further interest rate hikes in the US if it succeeds.
As we know, the Chinese have massive foreign exchange reserves in dollars. The Chinese want the yuan to strengthen against the dollar. It will increase the pressure on further interest rate hikes in the US if it succeeds.
Why? Because when more dollars come on the market, the US will have to do something to avoid hyperinflation in its country. Probably by issuing more expensive government bonds for investors to want to buy them with these dollars. Pressure on US bond prices will, in turn, translate into European markets by raising interest rates by European banks.
Chinese Banks Get Rid Of Dollars After Yuan Drops 11% This Week
Recall that the Chinese yuan has fallen 11% against the US dollar this year as a result of the aggressive campaign of rate hikes by the Federal Reserve. On Friday (October 21), the rate of USDCNH was around 7.25 yuan per dollar.
Chinese state-owned banks stepped up their intervention on Monday, October 17, to defend the weakening yuan. As reported by Reuters (1), six banking sources confirmed that China’s central state-owned banks have been “caught” exchanging yuan for US dollars on the futures market and selling those dollars on the spot market. China also used such measures in 2018 and 2019.
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(1) – https://www.reuters.com/business/energy/exclusive-chinas-state-banks-seen-acquiring-dollars-swaps-market-stabilise-yuan-2022-10-17/
