China state banks soaking up dollars

China's major state-owned banks bought dollars in the onshore spot market last week and held on to them in an unusually strong effort to rein in the strength of the yuan, according to people with knowledge of the matter.

- REUTERS

The dollar buying came as the yuan climbed to a 14-month high on Wednesday and extended a trend of state banks leaning against yuan gains in order to smooth its rise.

But unlike their usual trading strategy, the lenders did not appear to recycle the dollars into the swap market, market sources said, noting that the move was likely aimed at tightening dollar liquidity and so raising the cost of long yuan bets.

Back-end dollar/yuan swap points have since dropped, reflecting a deeper negative carry of owning yuan with the one-year tenor down from a one-month high hit last week.