Chinese state-owned banks are propping up the yuan while the central bank signals currency weakness

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Big banks in China are buying up yuan and selling the dollar in an effort to prop up the Chinese currency.

This week, major state-owned banks have been helping boost the yuan by swapping it for dollars in the onshore market and selling those dollars in the spot currency market, Reuters reported on Tuesday.

The move also comes as The People's Bank of China has lowered the dollar-yuan daily fixing rate to a three and a half month low of 7.1406 per dollar as of Tuesday.

But that banks have been active in the currency market this week came as a surprise to sources who spoke to Reuters, given the yuan's recent rally.

The yuan has gained 2% in the past week to its highest level in nearly four months, notching levels of around 7.13 to the dollar. The selling of US dollars by big state banks briefly pushed onshore spot yuan to 7.1296 per dollar.

The yuan's gains also come as the dollar has been weakening since last week, counting on the growing conviction that the Federal Reserve is done hiking interest rates. Still, the Chinese currency is down more than 3% against the dollar this year. 

Chinese banks have frequently sold dollars in the currency market this year to slow the yuan's decline. While a strong US dollar has been a part of the problem, the Chinese economy is also plagued with problems including a cratering real estate sector, shrinking trade, and long-term pandemic-related disruptions.

The economic malaise spurred the PBOC to launch a stimulus package issuing extra sovereign bonds to ease debt burdens of the country's local governments.