SHANGHAI, Feb 28 (Reuters) - China's banks are cutting the interest rates offered on U.S. dollar deposits after being asked to do so by the central bank, possibly to curtail dollar hoarding and also prop up a weakening yuan, sources said.

Mainland retail investors and exporters have built up nearly a trillion dollars worth of deposits because of higher U.S. yields and the yuan's slide.

Two banking sources with direct knowledge of the matter said banks across China, big and small, have over the past few weeks been told by the People's Bank of China $(PBOC)$ they have to cut dollar deposit rates.

This guidance seems aimed at discouraging a further rise in dollar deposits and spurring more conversion of those dollars into yuan CNY=CFXS, the sources said.

"We've got the guidance from the superior that we need to lower the dollar deposit rates, and many of our peers have already done so," said one of the banking sources, adding the regulators seem worried about the proportion of cash being held onshore in dollars.

The PBOC did not respond immediately to a Reuters request for comment.

Some banks have announced rate cuts. Bank of East Asia 0023.HK said on Wednesday that it will lower the one-year dollar deposit rate on $20,000 or more to 3.5% from the current 4.4% starting early March.

Bank of Nanjing 601009.SS said earlier this month it has lowered interest rates on dollar deposits above $3,000 to 2.1% for three-month tenors from 4.3% set in January.

China's capital controls and propensity among citizens to keep savings in dollars have meant onshore dollar deposits fetch less than in international markets, where 3-month dollar deposit rates are currently around 4.5%. But they are still higher than returns on the domestic currency, with yuan 3-month deposit rates around 1% or lower.

"Yuan rates are so low now, everyone is doing a carry trade by making dollar deposits," the second source said.

Foreign exchange deposits grew to $892.4 billion last month, the highest level since April 2023. Households' foreign exchange deposits stood at $146.1 billion, up 18% from a year earlier, and corporates' deposits grew to $451.9 billion, according to PBOC data.

China's commercial banks sold the most foreign exchange to their clients last month since July, official data showed, showing rising demand for foreign currency. The conversion ratio - a gauge that measures households' and corporates' willingness to sell dollars for yuan - fell to the lowest level in seven months.

YAWNING YIELD GAP

The wide gap between higher U.S. interest rates US10YT=RR and falling Chinese yields CN10YT=RR has been a factor eroding the yuan's appeal with onshore investors. That yield gap hit its widest-ever level in January.

Equally, U.S. President Donald Trump's tariff threats and a wobbly domestic economy have weighed, causing the yuan to weaken. It CNY=CFXS has lost 2.2% against the dollar since Trump's election win in November.

The PBOC had previously, in 2023, asked only the country's big five state banks to cut dollar deposit rates, capping them at 2.8%.

Those are the Industrial and Commercial Bank of China 601398.SS, Bank of China 601988.SS, Agricultural Bank of China 601288.SS, China Construction Bank 601939.SS, and Bank of Communications 601328.SS, whose combined assets comprise about 40% of the country's banking sector.

It was not clear if the big five have been asked to cut dollar deposit rates again this time. The first banking source told Reuters the "entire village" had been asked to reduce dollar rates.

(Reporting by Shanghai newsroomWriting by Vidya Ranganathan; Editing by Muralikumar Anantharaman)

((vidya.ranganathan@thomsonreuters.com; +65 6973 8261;))