September 4, 2018 / 7:08 AM / 16 days ago

Chinese state-run banks swap dollars for yuan offshore: traders

SHANGHAI (Reuters) - Chinese state-owned banks have swapped dollars for yuan in tenors ranging from a month to a year in the offshore forwards market in recent days, traders said on Tuesday, providing some support for the yuan as markets braced for a potential major escalation in the U.S.-China tariff war.

A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration

The public comment period on a U.S. proposal for new tariffs on Chinese goods is set to end on Thursday, after which U.S. President Donald Trump can follow through on plans to impose tariffs on $200 billion more of Chinese imports, though it is unclear how quickly that will happen.

One trader said the state-run banks had been conducting the swaps since Friday.

Another said the "intervention" was very mild, describing it as a defensive attempt to tighten liquidity and increase the cost of shorting the offshore yuan CNH=D3 ahead of Thursday.

“The tighter CNH liquidity condition could be a warning on CNH bears: there could be a CNH liquidity squeeze if market participants attempted to short sell CNH on the speculation of U.S. tariff implementation,” said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.

Analysts said China’s central bank may have to decide soon whether to intervene more forcefully to support the yuan as the United States readies more sweeping tariffs on Chinese goods.

After tinkering around the edges while the yuan fell for four straight months, the People’s Bank of China (PBOC) recently signaled it would be uncomfortable with further declines and managed to steady the currency before it tested the sensitive 7-per-dollar level.

However, some market participants noted that the move by the big banks in offshore yuan forwards market was opposite to their operations in the onshore forwards, traders said.

“In offshore, what big banks do is to tighten liquidity, while for onshore, they were collecting dollars for future use in the spot market,” said a third trader.

Major state-owned Chinese banks have been seen swapping yuan for dollars in onshore forwards CNYFWD= since mid-June, pushing the onshore yuan’s anticipated value sharply higher against the dollar in a year’s time.

The one-year tenor of the dollar/yuan swap onshore CNY1Y= stood at -170 points on Tuesday afternoon, while the offshore swaps CNH1Y= for the same tenor traded at 633.75 points. The offshore forwards have been pushed up by nearly 100 points since last Thursday’s closing of 540 points.

Reporting by Winni Zhou and John Ruwitch in Shanghai, and Coco Li in Beijing; Editing by Simon Cameron-Moore

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