FOREX: Chinese Intervention Works Against USDCNY Losses, Raises Cost of Long CNY

"CHINA STATE-OWNED BANKS SEEN BUYING DOLLARS - SOURCES" - Reuters
CHINA STATE-OWNED BANKS TWEAK TRADING STYLE TO BLUNT YUAN GAINS - SOURCES

• Report writes that "China's major state-owned banks bought dollars in the onshore spot market this week and held on to them in an unusually strong effort to rein in yuan strength, according to people with knowledge of the matter."
• "But unlike their usual trading strategy, the lenders did not appear to recycle the dollars into the swap market, market sources said, noting the move was likely aimed at tightening dollar liquidity and so raising the cost of long yuan bets."

The noteworthy part of that Reuters source piece: "the lenders did not appear to recycle the dollars into the swap market, market sources said"

• The net result of this is tighter local dollar liquidity - and more acute negative carry for any USD/CNY shorts.
• CNY swaps were heavily used in recent years on the other side of the trade: during the later years of the Biden admin Chinese exporters would use swaps to hold USD exposure while USDCNY rose, but allow them to settle supplier and tax payments in the local currency - which raised the supply of USD with state banks, which could then be sold in spot markets to contain USDCNY strength.
• As such, this week's behaviour can be seen as a more concerted effort to slow the decline in USDCNY (on top of recent strong fixings) as it not only raises the USDCNY spot price, but disincentivises exporters from accumulating CNY as a hedge to lock in margins.