According to sources, China is instructing certain banks to decrease or postpone their purchases of dollars.

According to sources, Chinese currency regulators are advising selected commercial banks to reduce or delay their acquisition of U.S. dollars as a measure to curb the depreciation of the yuan. This informal directive, known as "window guidance," follows a series of moves by authorities to support the currency, which has been affected by China's post-pandemic economic challenges and increased yields for major currencies, including the U.S. dollar. One insider emphasized that banks were urged to hold off on dollar purchases within their proprietary trading accounts due to the recent depreciation of the yuan.

As of now, the People's Bank of China (PBOC) has not provided a response to our inquiry for comments. The State Administration of Foreign Exchange (SAFE) has confirmed their outlook for a steady exchange rate and highlighted a 'risk-neutral' strategy for businesses and financial entities. They have restated their dedication to upholding the stability of the yuan at levels regarded as equitable and well-balanced. by

The closely managed yuan reached an eight-month low in July and has depreciated by 3.6% against the dollar since the beginning of the year, making it one of Asia's weakest performing currencies. While Chinese authorities have pledged to let market forces influence the yuan's movements, they expressed concern last month, underlining the importance of currency stability.

The "window guidance" indicates the central bank's intention to support the yuan, as noted by Ken Cheung, chief Asian FX strategist at Mizuho Bank. It also suggests that the PBOC possesses ample tools to defend the currency. By curbing non-urgent demand for dollars, the immediate pressure on the yuan could be alleviated, sources reported.

In 2021, a self-regulatory body led by the central bank implemented a similar measure, instructing banks to limit the size of their proprietary trading accounts to address yuan volatility. Thus far, monetary authorities have made minor adjustments, such as allowing companies to borrow more internationally and establishing more stable daily yuan benchmarks, in addition to some yuan purchases by state-owned banks.

Despite initial enthusiasm following the Politburo's discussions on real estate policy changes and measures to stimulate economic demand, investors are waiting for concrete actions before committing more capital to China. Goldman Sachs analysts pointed out that while authorities may slow the yuan's depreciation, significant challenges, including the vulnerability of the debt-heavy property sector and the disparity in monetary policies, are likely to keep it weak.

Investors, eager for expedited economic support measures, have been disappointed so far, reflecting in the lackluster performance of the country's stock markets. Both the Shanghai stock market and the blue-chip CSI 300 index are not only trailing regional and global peers, but foreign investors have also reduced their holdings of domestic A-share stocks, and overseas institutional investors have divested large amounts of yuan bonds.

The services trade deficit in China, driven in part by outbound tourism and logistics, more than doubled to $102.1 billion in the first half of the year, adding further pressure on the yuan. Additionally, seasonal factors, like overseas-listed Chinese companies requiring more foreign exchange in the summer to pay dividends, contributed to this situation. (Note: Exchange rate - 1 USD = 7.1673 CNY)