Exclusive-China’s state banks told to lower cap on dollar deposit rates -sources

8:30 am Tuesday, June 06th, 2023

SHANGHAI/BEIJING (Reuters) – In a rare attempt to bolster China’s yuan, a self-regulatory body overseen by the country’s central bank has told major state-owned banks to lower dollar deposit interest rates, four people with direct knowledge of the matter said.

This could encourage Chinese firms, especially exporters, to settle foreign exchange receipts in yuan, which has weakened to six-month lows against the dollar. The buoyant U.S. currency and the Federal Reserve’s interest rate hikes have prompted many Chinese companies to hoard dollar receipts.

Interest rates offered by the Chinese banks on dollar deposits of $50,000 and above would now be capped at 4.3%, the people, who declined to be named as they were not authorised to speak to the media, told Reuters.

The change came into effect on Tuesday, they said, adding the new rates the big banks can offer is set to be lowered by as much as 100 basis points from the previous ceiling of 5.3%.

Disappointing economic data, widening yield differentials with the United States, upcoming corporate dividend payments and continued capital outflows through foreign selling of stocks and bonds have combined to pile pressure on the yuan.

The yuan has lost more than 6% against the dollar since highs hit in January, when China reopened its borders, making it one of the worst performing Asian currencies this year. It last traded at 7.1199 per dollar. [CNY/]

China’s central bank said last month it would resolutely curb large fluctuations in the exchange rate and study the strengthening of self-regulation of dollar deposits.

A widening interest rate gap between the world’s two largest economies had fuelled a so-called carry trade, where investors borrow in a low-yielding currency to fund purchases of the other high-yielding one in order to make a profit.

“Subsequent carry trade will have to bear higher FX risks, and the move (to lower the cap on dollar deposit rates) could be considered as an official counter-cyclical measure,” a yuan trader said of the move.

China’s central bank has so far appeared calm after the yuan breached the psychologically important 7 per dollar level in May. But analysts and traders believed the People’s Bank of China (PBOC) would roll out policy measures if the pace and the size of the losses made it uncomfortable.

The PBOC did not immediately respond to a request for comment.

During previous rounds of depreciation, the central bank has sent verbal messages against one-way bets on the yuan. It has also used a ‘counter-cyclical factor’ to price the yuan’s daily guidance rate to lessen possible “herd effects” in the market and adjusted its FX risk reserve ratio to defend the yuan.

(Reporting by Beijing and Shanghai Newsroom; Editing by Sumeet Chatterjee, Louise Heavens, Mark Potter and Alexander Smith)