China’s central bank has added to measures designed to shore up the yuan, making it more costly for traders of forwards contracts to bet on swings in the currency.
The People’s Bank of China (PBOC) is to impose a reserve requirement on financial institutions trading in foreign-exchange forwards for clients, according to six people familiar with the matter.
The change, which is to take effect on Oct. 15, is to mandate a deposit of 20 percent of sales to be held at zero interest for one year, the people said.
“It’s a move to ease the reduction in foreign-exchange reserves,” DBS Bank Hong Kong Ltd managing director for treasury and markets Tommy Ong (王良亨) said. “It’s also meant to discourage speculation and ensures the yuan’s rates are reflecting genuine demand and supply. That includes cross-border yuan investment into fixed assets.”
The PBOC has intervened to prop up the yuan since the devaluation, a policy that eats into its US$3.65 trillion of foreign-exchange reserves.
The stockpile will drop by an estimated US$40 billion a month partly because of the support, according to a Bloomberg survey conducted last month.
Chinese Premier Li Keqiang (李克強) signaled support for the currency, saying late last week that there was no basis for further declines.
“The new move aims to curb speculative onshore positions as it makes the cost of buying dollars higher,” Hong Kong-based Standard Chartered PLC rates strategist Becky Liu (劉潔) said. “It will also remove lots of speculative trades that aim at short- term gains as the reserves have a minimum lock-up period of one year.”
The value of yuan forward transactions was US$51.1 billion in July, according to the Chinese State Administration of Foreign Exchange, compared with US$698 billion in the spot market.
The new reserve requirement comes as China pushes to add the yuan to the IMF’s reserve-currency basket in a review later this year.
The IMF has said China should reduce intervention except at times of excessive volatility and allow a more market-oriented exchange rate.
“The PBOC move is probably made to reduce the gap between onshore and offshore yuan rates, reduce volatility in the short run and reduce the cost to intervene in the onshore market,” Singapore-based Australia & New Zealand Banking Group Ltd currency strategist Irene Cheung (張雅怡) said. “But in the medium to long term, the yuan’s volatility and exchange-rate depends on fundamentals.”
The yuan yesterday climbed as the PBOC boosted its reference rate by 0.22 percent to 6.3752 a dollar, the most since November last year.
The currency closed 0.19 percent stronger at 6.3645 versus the greenback in Shanghai, according to China Foreign Exchange Trade System prices. That was the highest level since Aug. 11.
The onshore spot rate, which can trade a maximum 2 percent on either side of the PBOC’s daily fixing, has advanced 0.75 percent in the past five days.
“The new reserve requirement for forwards discourages speculation against the yuan,” Ong said. “I don’t see it having any major implications for IMF inclusion, as long as it doesn’t disrupt any major progress made so far.”
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