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China's banks are getting ready for bigger swings in the yuan

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While the yuan has been having its best year since 2011 against the US dollar, China's banks continue stocking up on foreign currency in a sign that they are preparing for greater swings in the exchange rate.

[BEIJING] While the yuan has been having its best year since 2011 against the US dollar, China's banks continue stocking up on foreign currency in a sign that they are preparing for greater swings in the exchange rate.

Depository corporations - a majority of which are lenders - boosted their holdings to 5.39 trillion yuan (S$1.1 trillion) in October, up 383 billion yuan so far this year, People's Bank of China data show.

That compares with an increase of 843 billion yuan in 2016, when the yuan slumped 6.5 per cent against the greenback. While the country's official foreign-exchange reserves, which now stand at US$3.1 trillion, get greater attention as observers gauge the country's opaque currency policy, banks are emerging as increasingly important actors.

In a year when the US dollar has seen a broad weakening, China has during some periods allowed greater fluctuation in the yuan's exchange rate, though a gauge of volatility has plummeted in recent weeks amid speculation policy makers want to avoid year-end turbulence.

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A recent study by the Federal Reserve Bank of New York urged further analysis of the role of publicly owned entities - which would include the nation's biggest banks - in damping intraday swings.

Chinese lenders have rarely drawn down their holdings in recent years. A bigger stockpile means they'll be better positioned to meet demand for both foreign currency and the yuan should China allow greater fluctuations in its exchange rate, according to BNP Paribas China.

"It's very necessary for the lenders to diversify their portfolios by holding a large amount of both the yuan and various overseas currencies," said Shan Kun, head of local-markets strategy in Shanghai at BNP Paribas.

"So if the yuan advances, they would buy more foreign-exchange at a lower cost; if the yuan drops, their foreign exchange hoard could make a profit."

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