China's state banks swap dollars for first time in more than three years

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China's state banks swap dollars for first time in more than three years

SHANGHAI: China's major state-owned banks are actively swapping dollars in the onshore forwards market, on Tuesday, according to five banking sources, pushing swap points into negative territory for the first time in more than three years.

The swaps increased dollar liquidity tensions as the US yields rose rapidly and the yield gap between the world's two largest economies effectively vanished.

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 at 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 can 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.

According to one of the sources, 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 in 2019 to support the Chinese currency, which faced mounting depreciation pressure due to heightened bilateral trade tensions with the United States.

The yuan gained some downside pressure this year, with the onshore currency losing 5.5 per cent of its value against the dollar this year to trade at an 18 month low as of Tuesday.