China's state banks may buy dollars in swaps to stabilise the yuan.

TODAY, Oct. 17 (Reuters) - SHANGHAI/BEIJING On Monday, Reuters reported that Chinese state banks had sold a large quantity of U.S. dollars and utilised a combination of swaps and spot deals to preserve the yuan against a decline in value.

In 2018 and 2019, six financial sources told Reuters that the country's largest state-owned banks have been seen trading yuan for U.S. dollars in the futures market and selling those dollars in the spot market.

According to the individuals, who have firsthand knowledge of market activities, the selling appeared to be directed at stabilising the yuan, with the swaps helping to acquire dollars and anchoring the price of the yuan in futures.

As of right now, the yuan is 11.6% weaker against the dollar than it was this time last year. On Monday, the exchange rate was around 7.1980 U.S. dollars.

Dollar/yuan forwards for the next year dropped precipitously in response to the central bank's moves, bringing the yuan down to 6.95 per dollar, according to one of the informants, a "very substantial" dollar-selling enterprise.

To maintain stability in the spot market, "the big banks want to acquire dollar positions from the swap market," claimed a second source.

While state banks in China often execute FX trades on behalf of the central bank, they are free to do so for their accounts or those of their business clients.

According to a third source, the trades of the state banks appear to be handled so that the closely watched $3 trillion in foreign exchange reserves are not used for intervention.

However, this action aids state banks in acquiring dollars when rising U.S. yields have made them both rare and expensive.

Much criticism was directed at China for the significant fall in official reserves during the economic slump in 2015 when the country burned through $1 trillion of reserves maintaining the yuan.