Chinese Exporters Cling To U.S. Dollar As Yuan Sinks

Chinese exporters are using a complicated currency swap strategy to avoid converting their dollar earnings into yuan for fear of losing out on potential gains in the US currency, official data and conversations with companies show. Jindong Zhang, Winni Zhou and Tom Westbrook reported for Reuters.

The swaps allow exporters to place their dollars with banks and get yuan instead, but through a contract that will eventually reverse the flows and give them back their dollars.

Filip De Mott reported for Business Insider that the offshore yuan could fall to 7.6 against the dollar by year's end, as predicted by a Bloomberg survey since investors are discouraged by China's economic slowdown and Beijing's response.

The yuan has lost more than 5% against the US dollar so far this year, including a 2% drop this month alone, and is being dragged even lower by foreign capital flowing out of the weakening economy.

The swaps allow exporters to place their dollars with banks and get yuan instead, but through a contract that will eventually reverse the flows and give them back their dollars.

The Wall Street Journal also disclosed that the People’s Bank of China (PBOC) has slashed the amount of foreign exchange that banks need to hold as reserves in a bid to boost the sagging yuan.

Frances Yoon reported that even as PBOC slashed interest rates, the Chinese economy continues to falter. It is just more profitable to hold on to US dollars and other currencies as the yuan sinks, the Associated Press (AP) also reported.

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