China's yuan firms as central bank takes fresh step to curb speculation

[SHANGHAI] China's yuan firmed on Monday as the central bank announced new moves to curb offshore speculation in the currency, while stocks were volatile after the securities regulator blamed immature markets and inexperienced investors for their latest meltdown.

The People's Bank of China (PBOC) said it would start implementing a reserve requirement ratio for some banks involved in the offshore yuan market, in a move that seemed intended to soak up additional liquidity.

"All in all, it appears that the Chinese authorities want to dampen the speculative flows that bet on a fast depreciation of its currency," said Zhou Hao, senior emerging markets economist for Asia at Commerzbank AG.

A turbulent start to 2016, with currency and stock markets tumbling, has stoked concerns that Beijing's policymakers are in danger of fumbling as China heads towards its slowest growth in 25 years.

Chinese shares opened sharply lower, before recovering to bounce in and out of positive territory. The Shanghai Composite Index was down 0.2 per cent at 0220 GMT, while the CSI300 index was flat.

Chinese equities had tumbled on Friday, with the Shanghai index closing lower than at any time since December 2014, leaving most investors who put their faith in Beijing's measures to end last summer's crash nursing losses.

"After experiencing the crashes last year, the sentiment is quite vulnerable and pessimistic now," said Xiao Shijun, an analyst at Guodu Securities in Beijing.

SQUEEZING SPECULATION

The latest move by the PBOC, first reported by Reuters at the weekend, comes as the authorities try to squeeze speculative activity in the Hong Kong-based offshore yuan market that has been exploiting gaps between onshore and offshore exchange rates.

On Friday the yuan had weakened sharply offshore, opening up a gap of more than 1 per cent with the steady onshore market.

China's central bank tightly manages the onshore currency market by setting a daily target for the yuan, which is allowed to trade within a 2-percentage point band either side.

The spot market opened at 6.5800 per dollar on Monday and was changing hands at 6.5792 in early trade, 48 pips below the previous close and 0.31 per cent away from the midpoint, which was set at 6.559.

The offshore yuan (CNH) was trading -0.18 per cent away from the onshore spot at 6.591 per dollar, firmer than the previous day's close of 6.6165.

Global markets have also tumbled at the start of 2016, with Asian shares sliding to their lowest levels since 2011 on Monday following weak US economic data and sharp falls in oil prices.

China's major share indexes have lost 16-18 per cent so far in 2016, taking them back to around the levels plumbed in August, when the market slumped more than 40 per cent in a summer crash.

Xiao Gang, head of the China Securities Regulatory Commission (CSRC), pledged over the weekend to strengthen oversight of the market.

"The abnormal stock market volatility has revealed an immature market, inexperienced investors, an imperfect trading system, and inappropriate supervision mechanisms," Mr Xiao said at an annual meeting. His remarks were published on the CSRC website.

REUTERS