Sep 02, 2015

    China central bank takes action to curb yuan speculation


    CHINA'S central bank plans to tighten rules on trading of currency forwards from next month, in a move to curb speculation and volatility after a shock devaluation of the yuan last month.

    The People's Bank of China (PBOC) has repeatedly intervened to stabilise the yuan since the Aug 11 devaluation - billed as free-market reform - sent shock waves through global markets and depressed emerging currencies.

    "The forwards move is yet another step to cushion unexpected strong expectations of yuan depreciation after the devaluation," Reuters quoted a senior trader at a major European bank in Shanghai as saying.

    The sources said the PBOC will require banks trading currency forwards to set aside reserves from Oct 15.

    Banks will be required to keep the equivalent of 20 per cent of their clients' forex forwards positions in dollar reserves to be held for a year at no interest, they added.

    The base for calculating reserves will be the nominal value of new contracts clients sign with banks to purchase dollars, or banks' dollar sales to clients.

    A forwards contract is an agreement to buy or sell an asset at a specified future date at a predetermined price, said Bloomberg.

    It can be used either to hedge the risk of a move in the price of the asset, or to speculate on one.

    Excluding clients' dollar sales to banks gives a clear signal the move is aimed at curbing the yuan's depreciation expectations in derivative markets, traders said.

    The cost of betting on the yuan is presently low in the onshore market, they said.

    "Cost to buy dollars in the forwards market will increase as banks will have to borrow money in the market to put as reserves in the central bank and they will transfer the cost to clients," said a trader with a US bank in Hong Kong, who has seen the new PBOC document.

    In the first seven months of this year, Chinese banks concluded new yuan/foreign currency forwards contracts in which clients bought dollars totalling 1.175 trillion yuan (S$260 billion), State Administration of Foreign Exchange data showed.

    At this pace, roughly US$5.3 billion (S$7.5 billion) would be frozen each month once the new rules take effect. There are no such requirements for reserves in China's local currency markets.

    The yuan's devaluation by nearly 2 per cent on Aug 11 rattled investor confidence and increased trading volatility, particularly in offshore markets. AGENCIES