China regulator warns banks against yuan selling, sources say

China's foreign exchange regulator phoned several banks on Wednesday to warn them against aggressively selling the Chinese currency, people with direct knowledge of the matter said, in a new sign of official discomfort with recent yuan weakness.

The Chinese yuan has been dropping against the dollar, and market participants said the telephone calls suggested authorities may be getting uncomfortable with the speed of the slide. The yuan jumped to 6.8605 per dollar in offshore trade after Reuters published news of the calls.

The currency hit a two-year low at 6.8704 earlier on Wednesday and is down about 1.8% in August so far, partly a reflection of gains in the greenback as US interest rates rise, but also in response to China's slowing economy.

"Buying too heavily in the dollar ended up with a call from the central bank," said one of the sources at a bank.

Four people familiar with the calls requested anonymity as they were not authorised to discuss them publicly. They did not provide further details about the calls, either.

Responding to a Reuters request for comment about the regulator contacting banks earlier on Wednesday, the State Administration of the Foreign Exchange (Safe) said it had not seen institutions unreasonably buying large amounts of foreign exchange in August, when market supply and demand were stable.

It added the yuan remained resilient compared with other non-dollar currencies, following recent rapid dollar gains, while China's robust trade surplus and utilisation of foreign capital continued to play a fundamental role in stabilising cross-border flows.

"Foreign exchange expectations are stable, which helps to keep the yuan exchange rate basically stable at reasonable and balanced levels," the Safe said in an emailed statement to Reuters.

The yuan's August's slide is the steepest since April, when China cut banks' currency reserve requirements to support the yuan. 

Earlier on Wednesday, Chinese state media cited market analysts as saying that the yuan has no basis for long-term depreciation, but officials have thus far been publicly quiet on the market moves. 

Ken Cheung, chief Asian FX strategist at Mizuho Bank, said the regulator's move suggested that yuan depreciation expectations had started to pick up.

"The authorities may want to stabilise the market expectations before guiding the yuan to weaken in an orderly manner," Cheung said.

Recent economic indicators showed that the Chinese economy is in the doldrums, with the latest alarm bell a record surge in unemployment payouts for June. 

The country's robust exports - the sole bright spot - could also face pressure from faltering global demand.

Outflows from the bond market and surprise cuts to two key interest rates last week also have put mounting pressure on the yuan, as yields and policy rates diverge from other big economies, where inflation is prompting hikes.