FX.co ★ Chinese banks get ready for yuan’s fluctuations

Chinese banks buy foreign currencies actively which is a sign that they get ready to significant fluctuations in the renminbi exchange rate. Remarkably, the yuan is a strong performer this year, having hit the highest levels since 2011 against the greenback.

Bearing in mind that China does not disclose its monetary policy to the public at large, experts try to guess the government’s intentions, closely watching actions of the local banks. In October the Chinese financial organizations built up the foreign currency reserves that reached 5.39 trillion yuan (USD 812 billion). A similar story happened in 2016 when, first, Chinese banks made massive purchases of the foreign currency and, second, the yuan took a nosedive against the US dollar, dropping 6.5%. According to BNP Paribas China, increased currency reserves signal that banks get ready to meet the demand for both foreign currencies and the yuan if the government tolerates major fluctuations of the exchange rate. "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, strategist at BNP Paribas in Shanghai. "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," he added.

That is why some experts feel pity for the countries that are going to settle payments with China in the national currency. The country with the government-controlled currency is always on the winning side as it can easily adjust the exchange rate when striking big deals.