- Authority asks institutions to step up currency checks
- Recent levels of support unsustainable, says analyst
China’s yuan posted the biggest three-day drop since August amid speculation that the central bank has reined in intervention to gauge whether recently imposed market curbs have succeeded in reducing bets against the currency.
The State Administration of Foreign Exchange has asked financial institutions in Shanghai and Guangdong to step up checks in their currency businesses, people familiar with the matter said on Tuesday. This came as the central bank confirmed it is imposing a 20 percent reserve requirement on institutions’ currency forward sales. The deposits, effective Oct. 15, will be held at zero interest for a year, said other people familiar with the matter.
The yuan in Shanghai, where moves are restricted to 2 percent on either side of a People’s Bank of China fixing, declined 0.17 percent to close at 6.3778 a dollar, according to China Foreign Exchange Trade System prices. It has lost 0.34 percent in three days, the most since the period ended Aug. 26. The freely traded currency in Hong Kong fell 0.15 percent to 6.4658. The PBOC set its daily reference rate at 6.3632.
“The PBOC has probably stepped back from aggressive intervention and wants to observe whether the administrative measures are effective,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “Also, foreign-exchange reserves have dropped quite a bit and the onshore market seems to have gradually stabilized, so it may not have to intervene as heavily as before.”
China on Monday reported a record $94 billion drop in its foreign-currency stockpile as the central bank sold dollars to prop up the yuan. The decline was partly due to the authority’s market operations and exchange-rate volatility, the PBOC said in a statement Tuesday. While major Chinese lenders have been seen offloading dollars on most days since the Aug. 11 yuan devaluation, sales have eased this week, said a trader from a foreign bank who asked not to be identified as he isn’t authorized to speak on the issue.
China’s leaders are trying to ease capital controls as they try to convince the International Monetary Fund that the yuan is freely usable enough to be granted reserve-currency status. At the same time, they have to ensure that the changes don’t spur outflows and impact the stability of its financial markets. The nation doesn’t want to use a decline in the yuan to boost exports, and the currency will be kept stable at a reasonable level, Chinese Premier Li Keqiang said at a World Economic Forum meeting in Dalian on Wednesday.
“The reality is that maintaining such levels of intervention is unsustainable in the long run,” said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. “The PBOC will eventually step away from active intervention to support the yuan.”
— With assistance by Tian Chen