Below are the main points from a Chinese article on the topic, interspersed with my comments.
囤点美元 (Hoard dollars)
China's largest privately run shoemaker, Aokang, exports 40 million pairs of shoes to the United States and Europe each year. Previously, the firm would swap U.S. dollars for yuan on the same day they were received, but now, "[We] keep as much as possible, we even wish we could keep all of it."
In the wake of the PBOC's interest rate cuts, demand for U.S. dollars has increased as the interest rate spread between the two currencies narrows.
The CEO of Aokang used to ignore the renminbi exchange rate because it was in an appreciating trend versus the U.S. dollar, but now he views it online everyday. Other executives check the exchange rate changes daily.
Hoarding of U.S. dollars is helped by an April 16 change in financial regulation, when SAFE repealed the regulation that compelled businesses and individuals to exchange their U.S. dollar remittances for renminbi.
Leaving the article for a moment, as far as I can tell, this news was not reported, as news outlets opted to focus on the widening of the trading band and allowing banks to short sell U.S. dollars. Chinese link:
强制结售汇制度退出历史舞台 企业和个人可自主保留外汇收入. The law had been gradually weakened over time, but this year saw it's full repeal.
A Dongguan shoe exporter has the same strategy as Aokang. Before, they would immediately exchange USD, EUR and JPY for CNY, but now they consider their business needs and the exchange rate before changing money. They slowly increased their retention rate of U.S. dollars from nothing to a current 40%.
Firms are also closing their dollar short positions. In previous years, Chinese firms would borrow in USD in order to benefit from the rising exchange rate and higher renminbi deposit rates. Now, they are reversing these trades and paying back dollar borrowings.
Here's a chart of foreign exchange loans to deposits (all foreign currency is included, not only U.S. dollars) showing what's happening:
The article quotes Wang Tao of UBS saying China has "oversold" $200 to 300 billion, while Citibank estimates it could be as much as $800 billion. China's SAFE reported a $3.7 billion foreign exchange settlement deficit in April, the first of 2012. (There was a deficit of $800 million in November and $15.3 billion in December of last year, when we last saw weakness in the yuan.)
Individuals and businesses aren't alone—although they are now allowed to short U.S. dollars, banks wish to hold net long positions in the U.S. dollar because all the major banks expect yuan depreciation in the short-term.
The central bank is also defending the renminbi when necessary (my edited translation):
Everbright Securities macroeconomic analyst He Yuanyuan found in the fourth quarter of last year and April this year, the central bank bought yuan and dumped foreign currency (expressed as a reduction in the total of foreign currency assets). This shows that China's central bank is in the market to support the RMB exchange rate, to prevent it from excessive devaluation. This shows from another perspective, the pressure of RMB devaluation.Google Translation of the article: 囤点美元
China is selling foreign exchange in order to defend the renminbi, which flies in the face of common wisdom that fears China dumping its U.S. Treasuries. The other side of the trade matters. It is the same with gold: common wisdom says buying gold will strengthen a currency, but look at India—massive gold imports are working to devalue the rupee. Various scenarios call for the U.S. to devalue against gold, but it is at the same time a gold buying strategy. If Chinese swap U.S. dollar assets for gold, oil or Japanese equities, the trade will weaken the dollar and may strengthen the yuan. If instead Chinese citizens or foreigners demand U.S. dollars, the other side of the trade is dumping yuan.
The takeaway is that the Chinese people have turned into U.S. dollar buyers, which will drain foreign currency from the central bank. Interest rates should be rising to defend the currency, but they are instead falling, opening up the potential for more significant devaluation later this year, most likely after the U.S. dollar strengthens and euro weakens.
There may be no major crisis in the currency, but that will depend on how much capital the central bank expends fighting devaluation. The country has moved from the dollar peg to a currency basket and advanced the internationalized the yuan, which will allow for more dollar outflows and depreciation should the greenback rally versus the yen and euro.
Finally, a yuan depreciation of 10% or more would be far from an FX crisis, but it would shock financial markets that remain overwhelmingly yuan bullish, especially because it will come in the midst of a global crisis. The psychological effects of a yuan devaluation expressed in the financial markets will far outweigh the economic impact.