PBOC is said to remove reserve rule for FX forwards trading

[BEIJING] China's central bank will effectively remove a reserve requirement for trading foreign currency forwards - a move that may slow the pace of yuan appreciation after its biggest two-week surge in at least a decade - according to people familiar with the matter.

Effective Sept 11, the People's Bank of China will stop requiring financial institutions to set aside cash when buying dollars for clients through currency forwards, the people said, asking not to be identified because they aren't authorized to speak on the matter in public.

The ratio is currently set at 20 per cent. The PBOC didn't immediately reply to a fax seeking comment after usual working hours.

Chinese authorities put the rule in place in October 2015 in a move seen as an effort to restrict dollar purchases when the yuan was weakening.

A removal would make it easier for traders to buy the US currency, reducing pressure for yuan appreciation. The Chinese exchange rate has rallied close to 5 per cent over the past three months amid speculation policy makers will buoy the exchange rate in the run-up to a key Communist Party meeting on Oct 18.

That Asia-beating surge has now prompted talk the PBOC may try and slow the advance.

The potential move to do away with the reserve requirement "is a good way to signal discomfort with the pace of appreciation and shake out the market," said Sacha Tihanyi, a strategist at TD Securities.

The time is becoming appropriate for China to scrap the requirement, China Merchants Bank analyst Wan Zhao wrote in a note earlier in the week.

With the dollar trending lower and the daily fixing regime having incorporated a counter-cyclical factor, greenback sales are driving the yuan stronger and it's time to treat clients' dollar buying and selling equally, according to the note.

The rally in the yuan had started to fuel speculation that policy makers were loosening their grip on the currency.

The offshore yuan weakened past 6.50 to the dollar Friday amid the report of the planned PBOC rule change. The onshore yuan erased an intraday advance of as much as 0.8 per cent to close 0.06 per cent in the red.

This step "is actually a better way of approaching the situation than simply intervening in the foreign-exchange market," said Robert Minikin, a foreign-exchange strategist at Standard Chartered Bank.

"This is quite an important signal here, suggesting the authorities feel that the currency may be strong enough to damage exports."

BLOOMBERG