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China to relax restrictions on banks' yuan trading, adding transparency

China will relax restrictions on banks' yuan trading starting in 2015, in a small but significant move towards relaxing its capital controls.

[SHANGHAI] China will relax restrictions on banks' yuan trading starting in 2015, in a small but significant move towards relaxing its capital controls.

The changes will replace daily caps on banks' foreign exchange positions with weekly limits, and for the first time establish unified standards for total foreign exchange positions that banks can hold.

The State Administration of Foreign Exchange (SAFE) published a set of new rules on Tuesday to simplify 14 sets of related regulations and add new provisions liberalising banks' forex trading practices. "The timing is well chosen," said a senior dealer at a major European bank in Shanghai. "With the dollar strengthening globally and emerging market currencies suffering from lingering weakness, it is good time to relax restrictions." The yuan has lost 1.3 per cent so far this month and looks set to close the year down 2.8 per cent in the face of bearish pressure which is expected to last well into 2015.

Starting from Thursday, SAFE will only check banks' position compliance status each week, according to the new rules published in the regulator's website,, leaving them leeway to short dollars within that period, traders said.

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However, SAFE appeared to discourage this interpretation in its statement. "While banks manage their positions on a weekly basis, their average daily positions should be kept within the limits defined by SAFE," the regulator said, in what traders said was an apparent signal that banks should not go too far.

While position caps for shorting dollars will remain unchanged, SAFE has published standards for total forex positions that will apply to everyone.

Banks previously needed to apply for quota individually.

All banks with less than US$100 million worth of forex settlement business in the previous year will be allowed total positions of US$50 million on average by the end of each day in a week, with a maximum short position value of US$3 million, according to the new rules.

Those recording a value between US$100 million and US$1 billion will be granted total positions of US$300 million and short positions of US$5 million.

Those doing over US$1 billion of business can have total positions of US$1 billion and short positions of US$10 million. "Those banks that cannot meet their business demand via the above-mentioned positions can apply to the SAFE for additional quotas," the regulator said.

The rules also apply to China-based foreign banks; overseas lenders that have more than one offices in China must appoint one key office to manage the positions, the rules said.

The new rules simplify application procedures for trading status in the foreign exchange market, and ease requirements for banks to exchange the yuan and foreign currencies in their capital reserves.