U.S. dollar and Chinese Yuan banknotes are seen in this illustration taken September 12, 2025. REUTERS/Dado Ruvic/Illustration

Dec 4 (Reuters) - China's major state-owned banks bought dollars in the onshore spot market this week and held on to them in an unusually strong effort to rein in yuan strength, according to people with knowledge of the matter.

The dollar buying came as the yuan leapt to a 14-month high on Wednesday and extended a trend of state banks leaning against yuan gains in order to smooth its rise. [CNY/]

But unlike their usual trading strategy, the lenders did not appear to recycle the dollars into the swap market, market sources said, noting the move was likely aimed at tightening dollar liquidity and so raising the cost of long yuan bets.

Back-end dollar/yuan swap points have since dropped, reflecting a deeper negative carry of owning yuan with the one-year tenor down from a one-month high hit last week.

The state bank actions were meant to moderate the pace of yuan rallies rather than reverse an upward trend, said one of the sources. All requested anonymity because they are not allowed to discuss the matter publicly.

The yuan weakened a little to 7.072 per dollar after Reuters reported on the state banks' trading. It had already fallen in morning trade, following a surprisingly soft fixing of its trading band, which knocked it from a 14-month high.

Slowing the yuan's rise makes it harder to hold long positions because profits don't make up for the difference in interest income between dollars and the lower-yielding yuan.

State banks sometimes trade on behalf of the central bank, but they could trade on their own behalf or execute orders for their clients.

China's central bank, the People's Bank of China did not immediately respond to a request for comment.

YUAN POSTS BIGGEST ANNUAL GAIN SINCE 2020

The Chinese currency has gained about 3.3% on the dollar year-to-date and on Thursday looked set for the biggest annual rise since the pandemic year of 2020.

The appreciation of the tightly managed currency has been helped by authorities' signalling their tacit approval, with the middle of the yuan's daily trading band repeatedly set firmer than market expectations.

But it has been smoothed by the state banks, prompting speculation the aim is a gradual rise that would avoid sudden yuan purchases by exporters and project the sort of stability that can encourage global use of the currency.

(Reporting by Reuters staff. Editing by Sam Holmes and Louise Heavens)