China’s central bank has instructed major state-owned banks to reduce interest rates on dollar deposits in an effort to strengthen the yuan, according to sources familiar with the matter.
This move encourages Chinese companies, especially exporters, to settle their foreign exchange receipts in yuan.
The yuan has recently weakened to a six-month low against the dollar due to the strong US currency and interest rate hikes by the Federal Reserve, leading many Chinese firms to hoard dollar receipts.
Under the new directive, the interest rates offered by Chinese banks on dollar deposits of $50,000 and above will be limited to 4.3%.
This change took effect on Tuesday, and the maximum rates that the major banks can offer are expected to be reduced by up to 100 basis points from the previous ceiling of 5.3%.
Since reaching its peak in January when China reopened its borders, the yuan has depreciated more than 6% against the dollar, making it one of the worst-performing Asian currencies this year. Its current exchange rate stands at 7.1199 per dollar.
Last month, China’s central bank stated its intention to regulate dollar deposits more effectively and stabilize the exchange rate.
The widening interest rate gap between the two largest economies in the world has driven investors to engage in carry trades, where they borrow in low-yielding currencies to fund investments in higher-yielding ones
Analysts and traders believe that the People’s Bank of China (PBOC) could introduce additional policy measures if the pace and magnitude of the yuan’s losses become uncomfortable.
In the past, the central bank has discouraged one-way bets on the yuan, adjusted its daily guidance rate using a counter-cyclical factor, and adjusted its foreign exchange risk reserve ratio to defend the currency. The PBOC has not yet responded to requests for comment on the latest move.