Chinese banks helped clients sell a record amount of foreign currencies back into the yuan in December, supercharged by expectations of appreciation and increased seasonal demand.
Onshore lenders sold a net $99.9 billion of foreign exchange on behalf of clients in December, over six times the amount in the prior month, according to data released late Thursday by the State Administration of Foreign Exchange. Both corporates and investors positioned for gains in their home currency.
The yuan has strengthened over 1% versus the greenback in the past month, making it the best performer in Asia, and it breached the key threshold of 7 per dollar. The rally has been driven by broad dollar weakness and China’s swelling trade surplus, as well as optimism around economic growth that is supporting advances in onshore stocks.
There’s also likely a seasonal tailwind as settlement activities usually jump in December, because exporters tend to convert currency for operational needs before year-end.
The data “points to a notable shift in market expectation around the yuan toward appreciation,” said Xiaojia Zhi, an economist at Credit Agricole CIB, citing “weaker dollar expectations and more positive sentiment around China equities, with equity rotation out of US tech stocks toward China ones.”
Moreover, the People’s Bank of China has been setting the yuan’s daily reference rate steadily stronger in recent weeks, signaling tolerance for appreciation at a managed pace. Thursday’s fixing came in at its strongest level since May 2023.
As the yuan extends its advance, global banks have been revising their forecasts toward further strengthening. Morgan Stanley last week predicted the yuan will hit 6.85 per dollar in the first quarter, versus 7.05 previously. Australia & New Zealand Banking Group now sees it reaching 6.85 by year-end, and Macquarie Group expects 6.8.
Another potential tailwind for the yuan in the months ahead: Chinese firms may unwind some of their holdings in the greenback, according to Zhongtai Securities, which estimates the total stockpile of foreign exchange not settled by exporters since 2022 to be about $930 billion.
“We expect firms to turn more willing to sell foreign exchange in 2026, which will form a positive conjunction with yuan appreciation,” analyst Zhang Deli writes in a note.
The post “China’s FX Conversion Jumps to Record as Firms Rush Back to Yuan” first appeared on Bloomberg
