© Reuters. Banknotes of the Chinese yuan and the US dollar are seen in this illustration photo taken on September 29, 2022. REUTERS/Florence Lu/Illustration
SHANGHAI/BEIJING (Reuters) – China’s central bank surveyed some foreign banks last week about the interest rates they offer customers for dollar deposits, people familiar with the matter said, as authorities step up efforts to slow the yuan’s depreciation.
The central bank has also directed a commercial lender to cut such rates, one of the sources said, as recent weakness in the Chinese currency has prompted authorities to take more scrutiny of foreign exchange dealings. But the source did not provide more details.
The move could prompt companies, especially exporters, to shift more foreign exchange receipts into the yuan, which has weakened to nearly an eight-month low and lost nearly 5% so far this year. (CNY/)
The data showed that total foreign currency deposits in China reached $851.8 billion at the end of May.
The People’s Bank of China did not immediately respond to a Reuters request for comment.
The People’s Bank of China (PBOC) said in mid-May that the authorities will resolutely curb large fluctuations in the exchange rate and consider strengthening self-regulation of dollar deposits.
Weeks later, sources told Reuters that a self-regulatory body supervised by the central bank had asked major state-owned banks to lower interest rates on dollar deposits. Major banks were asked to cap them at 4.3%, from the previous ceiling of 5.3%.
Widening bond yield differentials between the world’s two largest economies, driven by further divergence in monetary policy, added negative pressure on the yuan. China is preparing to provide more political support to support the faltering economic recovery, while the US Federal Reserve could keep interest rates high for a while longer.
As part of official measures to prevent the yuan from sinking too quickly and too far, the People’s Bank of China (PBOC) set stronger-than-expected guidance rates this week, and state banks have been spotted selling dollars multiple times in both the onshore and offshore markets, trading. sources said.
Market participants interpreted the measures as the strongest sign yet that the authorities are growing increasingly uncomfortable with the yuan’s accelerating decline. They expect policy makers to take further policy action to increase the cost of currency speculation if one-way bets on the yuan’s decline continue.
A Reuters poll conducted on Thursday showed that investors are increasing their short positions in the currency.
“Any attempt to counteract weakness (will) most likely slow down the pace of decline rather than reverse the trend,” said Christopher Wong, currency analyst at OCBC Bank.
However, some market watchers said companies were unlikely to follow the path intended by the authorities, and lower dollar deposit rates may even prompt them to funnel their capital out of China into offshore accounts.
“This move can help increase dollar deposits abroad,” said a trader at a foreign bank, adding that it could add negative pressures on China’s balance of payments and the yuan.