China's state banks seen mopping up offshore yuan liquidity - sources
China's major state-owned banks are actively acquiring offshore yuan liquidity, raising the cost of shorting the Chinese currency and potentially stabilizing the yuan.
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Posted 8/21/2023, 9:34:59 AM
channelnewsasia.com
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China is considering providing cheap funding to local government financing vehicles (LGFVs) in an effort to address debt concerns and improve their cashflow amid mounting risks, according to reports, with the central bank potentially setting up an emergency liquidity tool to provide low-cost, longer-term funds. The move comes as authorities also mull plans to cut LGFV debt, including allowing provincial-level governments to raise about 1 trillion yuan through special bonds sales to repay the debt of LGFVs and other off-balance sheet issuers. The measures are part of China's efforts to address the major economic and financial risks posed by LGFV debt.
China's central bank has asked domestic banks to scale back their outward investments through the Bond Connect scheme in an effort to contain yuan flows into Hong Kong and limit the supply of yuan in offshore markets, as part of various measures to prop up the Chinese currency.
Global investors are skeptical of China's ability to stabilize its financial markets, with many predicting that economic pressures will cause the offshore exchange rate of the yuan to reach record lows.
China's offshore yuan weakened after the country's central bank announced a cut in banks' reserve requirement ratio, which aims to support the economy but could further worsen the decline of the yuan.
China is unlikely to devalue its currency, the yuan, despite concerns that it could do so to boost exports, as such a move would risk intensifying capital flight and tightening financial conditions, according to the Institute of International Finance. Instead, the focus will be on domestic easing measures to maintain steady growth, although there is the challenge of balancing the yuan's stability against the strengthening US dollar and other major currencies.
Major Chinese property company Sino Ocean has suspended offshore debt payments and trading of its US dollar-denominated bonds as it faces liquidity pressures due to a sales slump in the real estate industry, adding to concerns about China's property sector.
China is experiencing a significant outflow of capital, putting pressure on the yuan and raising concerns for authorities as the currency weakens and financial markets become destabilized.