[BEIJING] China's central bank moved to curb speculation in the currency market and limit capital outflows, imposing a reserve requirement on financial institutions trading in foreign-exchange forwards for clients.
The People's Bank of China, effective Oct 15, will mandate a deposit of 20 per cent of sales to be held at zero interest and frozen for a year, according to six people familiar with the matter. The change, which will take effect on Oct 15, is aimed at preventing macro financial risks, said the people, who asked not to be identified because they aren't authorised to speak publicly.
China rocked world financial markets on Aug 11, when it devalued the yuan in what it said was a one-time adjustment. The PBOC said that day it would promote the convergence of the onshore and offshore yuan rates. The currency in Shanghai declined 2.6 per cent in August, the biggest monthly decline in two decades.
"The PBOC hopes to limit the selling of yuan forwards on persistent depreciation expectations," said Andy Ji, a Singapore-based currency strategist at Commonwealth Bank of Australia. "But the depreciation pressures will remain as the real economy continues to slow." The currency in Shanghai rose 0.08 per cent Tuesday to 6.3714 a dollar as of 10:43 am in Shanghai, while the offshore rate climbed 0.16 per cent to 6.4352 in Hong Kong. The new rule is a step toward preventing capital outflows by increasing the cost of speculation in the forwards market, according to Rabobank Group.
"My first impression is that this may drive a slight technical convergence in the onshore and offshore yuan curve from current levels," said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong. "I am not sure more restrictions bring us closer toward financial market reform." The PBOC didn't immediately reply to a fax seeking comment.