China Said to Consider Controls on Yuan Forward Transactions
Yuan 12-month forwards rose the most this year yesterday, gaining 0.6 percent to 6.7081 per dollar. Photographer: Qilai Shen/Bloomberg
China is considering controls on yuan forward transactions to deter investors from betting on an end to its 23-month peg to the dollar, according to two people familiar with the matter.
The State Administration of Foreign Exchange, the nation’s top currency regulator, is seeking opinions from banks about the policy change, said the people, who asked not to be identified as the consultations aren’t public. The rule may raise the minimum requirement for a bank’s foreign-exchange holdings if contracts obliging them to deliver yuan to clients in the future exceed those in which they agree to receive the local currency.
China has been seeking to limit inflows of capital betting on yuan appreciation, as central bank Governor Zhou Xiaochuan prepares to end a link to the dollar adopted in July 2008 to protect exporters during the financial crisis. Banks are currently required to hold enough foreign exchange to meet commitments at the day’s end. Under the new system, they may have to hold more than needed, the people said.
“That would put banks in a dilemma of either increasing foreign-exchange risk or cutting sales of yuan forwards to clients,” said Zhao Qingming, a senior analyst in Beijing at China Construction Bank Corp., the country’s second-largest lender. “They would choose the latter.”
Banks aren’t allowed to hold net short positions on foreign currencies when they close their trading books each day, under rules introduced as the yuan appreciated 21 percent in the three years until July 2008, the people said. Under the new proposal, net long positions may be required, they said. Short positions profit as an asset falls, while long ones benefit from gains.
Forwards Fall
Group of 20 finance chiefs agreed in Busan, South Korea, over the weekend to cooperate in bolstering capital requirements at banks and tightening financial-market regulation. Forwards are agreements in which assets are bought and sold at current prices for future delivery. SAFE hasn’t replied to faxed questions sent yesterday by Bloomberg seeking comment.
The central bank’s purchases of dollars to prevent the yuan from rising helped swell the world’s largest foreign-exchange reserves largest to a record $2.45 trillion at the end of March. The regulator told banks to investigate forward contracts and overseas borrowings to enhance monitoring of speculative capital, the Shanghai Securities News reported in March.
Investors pared expectations for the currency’s appreciation in the past two months as Europe’s debt crisis threatened to cool a recovery in China’s exports. The euro has dropped 17 percent against the yuan this year and yesterday reached its weakest level since 2002.
Crisis Stance
Twelve-month onshore yuan forwards fell 0.1 percent to 6.772 per dollar as of 4:38 p.m. in Shanghai, reflecting bets the currency will strengthen 0.9 percent from the spot rate of 6.8299.
Traders onshore are more bullish than those in the offshore, non-deliverable market, which is only pricing in appreciation of 0.7 percent. Non-deliverable contracts are settled in dollars and aren’t regulated by China. The controls SAFE is said to be considering would “limit the ability of onshore banks to facilitate on-offshore arbitrage activity,” said Bernard Yeung, head of foreign-exchange trading at National Australia Bank Ltd.
“Onshore corporates will have to sell back their dollar- yuan NDFs and buy dollar-yuan forwards in onshore markets to close out positions,” he said in Hong Kong.
‘Still Worried’
The central bank Governor Zhou said on March 6 that policy makers will exit their crisis stance, including in foreign- exchange policy, “sooner or later.” Finance Minister Xie Xuren on June 5 urged the G-20 to be cautious about ending stimulus programs and to preserve policy continuity.
The regulator is also planning to step up management of banks’ short-term overseas borrowings, according to the two people, who didn’t disclose details.
“It may be that they are still worried about appreciation expectations and capital inflows, although these risks have faded in the past month,” said Ben Simpfendorfer, a Hong Kong- based economist at Royal Bank of Scotland Plc, the world’s fifth-biggest currency trader. “I think they should move the yuan now, and it’s a fantastic time to move, but there is no suggestion they will.”
RBS predicts China will let the yuan appreciate by the end of the third quarter of this year, having revised an earlier projection for an adjustment by the end of the second quarter.
--Bob Chen, Sandy Hendry. Editors: Simon Harvey, James Regan
To contact Bloomberg News staff for this story: Bob Chen in Hong Kong at +852-2977-6631 or bchen45@bloomberg.net
Rate These Stories
Rate this Page