Shanghai/Beijing, January 22: In response to the sharp decline in China’s A shares, major state-owned banks have taken proactive steps to stabilize the yuan and counter negative market sentiment. The benchmark Shanghai Composite index recorded its most significant one-day drop since April 2022, falling 2.7% on Monday.

Sources with knowledge of the matter revealed that state-owned banks have tightened liquidity in the offshore foreign exchange market while actively selling U.S. dollars onshore. The primary objective is to prevent the yuan from depreciating rapidly as overseas funds continue to divest from Chinese equities, with approximately $1.6 billion sold so far this year.

Gary Ng, senior economist for Asia Pacific at Natixis, commented, “It is a clear policy signal to stabilize the yuan and counter the negative market sentiment on equities.”

The offshore yuan tomorrow-next forwards surged to a more than two-month high of 4.25 points on Monday, indicating signs of tighter liquidity conditions. State banks operating in the offshore market reportedly reduced lending to their peers, contributing to the increase in offshore yuan costs and making shorting the currency more expensive.

Simultaneously, state banks engaged in aggressive dollar-selling in the onshore spot foreign exchange market to prevent rapid declines in the yuan. The defense of the 7.2 per dollar level became particularly assertive, highlighting the commitment to maintaining stability.

As state banks often act on behalf of China’s central bank in the foreign exchange market, these measures are seen as coordinated efforts to address the challenges posed by the recent stock market turbulence. While the onshore yuan last traded at 7.1963 per dollar, experiencing a nearly 1.4% decline this year, its offshore counterpart stood at 7.2047.

Investor confidence in the world’s second-largest economy has been shaken by signs of an economic slowdown, prompting the Chinese authorities to take swift and decisive actions to stabilize the financial markets. The sources providing this information spoke on condition of anonymity, as they are not authorized to publicly discuss market conditions.