In efforts to bolster the yuan, China's major government-controlled banks began offloading their US dollar holdings to acquire the Chinese currency in both domestic and international spot markets during the early Asian trade session on Tuesday, media has reported, citing sources familiar with the situation.
As per reports, in September 2022, China's central bank urged state banks and their branches overseas, including Hong Kong, London, and New York, to get ready to sell off the dollar for the domestic currency in international markets, intensifying their actions to halt the drop of the yuan.
China's Politburo's Role in FX Stability
Beijing is centering its efforts on strengthening the national market demand, indicating additional measures to stimulate the economy, and assuring the maintenance of a fair and steady yuan exchange rate.
The decisive move is in harmony with the current adjustment of foreign exchange (FX) policy by the People's Bank of China (PBOC).
"It is interesting that the Politburo mentioned FX stability in the statement, for the first time in recent years. This means that smoothing yuan depreciation pressure may become more of a policy priority from now on. This is in line with the People's Bank of China's (PBOC) further tightening of FX policy recently," according to HSBC analysts.
China's fiscal authorities have been stepping up measures to safeguard their currency recently. Just last week, they eased regulations to permit firms to secure increased foreign loans, and the PBOC has invariably established a robust daily midpoint guidance rate than the market anticipated.
Yuan's Momentum
The mainland yuan surged over 0.6 percent to reach a peak of 7.1411 against the US dollar and was trading at 7.1541 as of 0314 GMT. It has experienced a 3.5 percent decline against the US currency in the current year.
The foreign equivalent mirrored the upward trend and a weekly peak of 7.1475, before settling at 7.1542 during the latest trading session.
Yuan's Embrace Fuels Increasing De-dollarization
The increasing appetite for adopting the yuan could also signal a worldwide thrust towards reducing dollar dependency, as numerous central banks are shifting their focus away from the dominance of the world’s reserve currency. This comes in response to the US weaponizing the dollar in the wake of NATO’s proxy war against Russia, inadvertently dissuading other nations from over-reliance on it.
Reports reveal that the use of the Chinese yuan in global currency swaps (a bilateral agreement enabling banks to swap each other's currencies, ensuring repayment at a fixed date with interest, at the original exchange rate) experienced a substantial upswing during the last quarter of March, marking the second most significant rise of the period as an increasing number of nations engaged in yuan-based transactions.
During the first quarter of the year, swap line totals constituted 109 billion yuan, surpassing the preceding quarter by 20 billion yuan, as per referenced information from the Chinese central bank. This corresponds to a value of $15.6 billion.
Governments may opt for this approach when they find it necessary to infuse funds into their national banking system. Argentina utilized swaps in April to counter a substantial sell-off of the Argentine peso.
Also, international financial institutions have spearheaded a notable surge in gold holdings over the last several months, propelling a record peak in the past three quarters.
All these changes in financial policies around the globe demonstate the dwindling dollar hegemony, prompted by unstable US policies, with the greenback's status as global reserve currency becoming more and more questionable.