China's central bank asks state lenders to reduce dollar purchases, sources say

(Reuters) - China's central bank will not allow sharp yuan declines and has asked major state-owned banks to reduce U.S. dollar purchases, people with direct knowledge of the matter said on Wednesday.

The directive from authorities comes as the yuan faces heavy downward pressure following massive U.S. tariffs on Chinese exports and retaliatory moves by Beijing.

The People's Bank of China (PBOC) sent the window guidance, which is its informal style for managing policy around markets, to state banks this week, asking them to withhold U.S. dollar purchases for their proprietary accounts, three sources said.

Big banks were also told to step up checks when executing dollar purchase orders for their clients, one of them said, in a move markets interpret as a way for the central bank to curb speculative trades.

The country's big state banks were seen selling dollars and buying yuan aggressively to slow the pace of yuan declines in the onshore spot market on Wednesday, two separate sources said.

China's yuan has lost about 1.3% so far this month and was last at 7.35 per dollar on Wednesday, while its offshore counterpart hit a record low overnight.

Additionally, China's central bank will not resort to yuan devaluation to soften the blow from tariffs on exports and the broad economy, three policy advisers and another banker familiar with the central bank's thinking told Reuters.

"A sharp depreciation will not happen as that could hurt market confidence, but a modest depreciation will help exports," said one of the policy advisers.

"We should also assist key enterprises through subsidies, tax rebates, or market diversification."

The onshore yuan rebounded about 50 pips after the Reuters story was first published at 0748 GMT, paring much of its intraday declines. The offshore yuan also gave back about 120 pips of its losses.

The PBOC's focus on steady yuan moves comes even as the worsening U.S. trade war severely challenges the competitiveness of China's massive export sector, suggesting financial market stability remains the priority.

The PBOC did not immediately respond to a request by Reuters for comment. All the sources spoke on condition of anonymity, as they were not authorised to talk about market matters publicly.

U.S. President Donald Trump's "reciprocal" tariffs on dozens of countries took effect on Wednesday, including 104% duties on Chinese goods, deepening his global trade war.

A weaker yuan would make exports cheaper and alleviate some pressure on China's trade and the broader economy, but a sharp depreciation could fuel unwanted capital outflow pressure and risk financial stability, analysts have said.

Speculation China's central bank is preparing to allow that perked up this week, after the PBOC slightly loosened its grip on the currency.

The bank allowed its official midpoint guidance rate, around which the daily spot rate is allowed to move in a 2% band, to weaken past a key threshold for the first time since 2023.

"We are of the view that policymakers may prefer to maintain some degree of measured yuan stability," said Christopher Wong, FX and rates strategist at OCBC Bank.

"We would continue to monitor the daily fixing trend for indication of policymakers' preference," he said.

More modest increases in the PBOC's dollar-yuan fixing rates should calm sentiment and provide some reprieve for other heavily sold emerging Asian currencies, he said.

(Reporting by Reuters staff; Editing by Vidya Ranganathan and Sam Holmes)