BEIJING, 23 September 2025 — State-owned Chinese banks have begun unwinding a previous strategy of borrowing dollars via swaps while buying yuan in the spot market, reversing course amid a strengthening yuan by instead selling the currency in the spot market and offsetting those trades with dollar swaps. Traders say the move is part of efforts to moderate the yuan’s recent appreciation, but it may reinforce downward pressure in the short term.
According to traders who requested anonymity, these banks have over recent months ramped up spot-dollar purchases and offered more dollars for yuan through swaps. While in theory the net effect of spot and swap positions should balance out, the strategy is seen as negative for the yuan because it front-loads selling pressure. The change marks a shift from the past two years, when state banks had largely supported the yuan by taking the opposite positions—borrowing dollars via swaps while buying yuan in spot—helping drive currency gains.
Mechanics of the Shift & Market Reactions
On the foreign exchange markets, these shifts are visible in the changing dynamics of swap points. Onshore 12-month swap points for the yuan (the premium or discount between agreeing to exchange yuan/dollars in the future versus today) have become less negative, their least negative level since 2022. This suggests that forward dollar positions are increasingly expensive relative to spot positions.
Traders also note that swap points in the onshore yuan market have climbed above those offshore—an inversion not commonly seen, marking a strong local demand for dollars. Some see this as evidence that banks are recalibrating internal exposure to currency risk and taking profits from past positions as well as responding to green shoots of yuan strength.
The onshore yuan recently rose to its strongest level since November, before trading sideways in the sessions that followed. While this firmness aids consumer purchasing power and supports investor confidence, it also raises concerns for China’s export competitiveness if the yuan continues appreciating too far.
Why State Banks Are Acting & Potential Implications
Standard Chartered’s head of China macro strategy, Becky Liu, suggested the change could be either an unwinding of previous trade positions or a deliberate strategy to rein in rapid yuan appreciation.
For market participants, a central theme is managing the trade-off between stabilizing the currency versus preserving export competitiveness. A stronger yuan reduces inflationary pressures from import costs and can attract capital flows, but if too strong, it can hurt exporters who receive revenues in foreign currencies.
The shift by state banks may also influence the behaviour of private banks and corporates, which monitor swap spreads and forwards to manage their hedging and trade finance needs. If expectations tilt toward further yuan strength, more entities may reduce their hedging or dollar reserves, which could feed back into currency and capital flows.
Investor Takeaways & Risks
From an investor perspective, this development underscores the importance of watching FX and derivative markets for clues about China’s currency policy and state bank behaviour. Firms with exposure to Chinese exports or import-costs (raw materials priced in dollars) are particularly sensitive.
Investors should monitor whether this strategy is sustainable—if state banks continue selling yuan or swap points widen unfavorably, it may spark volatility. Another risk is that export volumes may weaken if the yuan strengthens too quickly, or that foreign investors misjudge policy intentions and get caught by sudden reversals.
