China FX regulator surveys banks about positioning as yuan plunges – sources

SHANGHAI/BEIJING  -China’s foreign exchange regulator sent a survey to some banks late on Monday asking them about their positioning in the currency market, three sources with direct knowledge of the matter told Reuters.

The survey comes at a time when China’s yuan is hitting its weakest levels since the global financial crisis of 2008, and its offshore unit is hitting record lows, succumbing to the broad strength of the U.S. dollar.

“The FX regulator asked (us) about our market views and our positioning,” said one of the sources.

Another of the sources said the survey was conducted around the time the yuan “overreacted” as some market participants were apparently “maliciously shorting the yuan”.

Two of the sources said the State Administration of Foreign Exchange (SAFE) made it clear the survey was urgent.

The sources spoke on condition of anonymity as they are not authorised to discuss the issue.

The SAFE did not immediately respond to a Reuters’ request for comment.

“The regulator is using the survey to investigate the cause and views around the sharp yuan losses on Monday, and therefore the regulators could prescribe the right medicine for the right problem,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

The U.S. dollar’s swift rise on the back of aggressive Federal Reserve monetary tightening and a slowing Chinese economy have piled downside pressure on the yuan, which has lost more than 13 percent against the dollar so far this year and looks set for its biggest annual drop since 1994, when China unified market and official rates.

China, along with Japan, has been a major outlier in the global tightening spree to tame high inflation, with Beijing focused more on propping up its COVID-hit economy. Such policy divergence has stoked the depreciation and capital outflows.

Mainland authorities have already rolled out a slew of measures to stem the fast yuan declines, including raising a parameter on cross-border corporate financing to make it easier for domestic firms to raise funds from overseas markets.

“The next move could be tightening overseas lending,” said Xing Zhaopeng, senior China strategist at ANZ.

“Foreign exchange reserves are at a critical level, and some market participants are betting that the authorities will eventually intervene.”

China’s foreign exchange reserves now stand at just above the closely watched $3 trillion level. China burnt through $1 trillion of the official reserves supporting the yuan in the last economic downturn in 2015.

“China is likely to protect the reserves this time round as the Congress emphasizes that foreign exchange reserves are an indicator of comprehensive national strength,” said ANZ’s Xing.