China extends yuan forward deposit rule to foreign banks

BEIJING • China will expand to foreign banks a measure designed to shore up the yuan and make it more costly for traders of forward contracts to bet on swings in the currency.

The People's Bank of China will from Aug 15 begin imposing a 20 per cent reserve requirement on offshore financial institutions trading foreign exchange forwards for clients, according to a statement on chinamoney.com.cn, a website of the China Foreign Exchange Trade System.

The money will have to be deposited when the institutions settle trades in the onshore market and it will be held at zero interest for one year, according to the statement.

"This kind of tax will not change market expectations, and therefore will have limited impact on containing capital outflows," Mr Zhou Hao, an economist at Commerzbank in Singapore, wrote in a note.

"The timing is quite interesting as both CNY and CNH are testing a new high of 6.70," he continued, referring to the onshore yuan and offshore yuan, respectively.

"Today's announcement, in my opinion, hints that China's central bank sees that it is the time to change the trajectory of the CNY exchange rate."

The central bank in October last year implemented a similar rule for domestic traders, a move intended in part to support the yuan.

Yesterday's statement comes amid rising pressure on the yuan, with Britain's vote to leave the European Union adding to the stresses of a weakening economy and the risk of capital outflows.

The yuan fell to fresh 5-1/2 year lows against the US dollar yesterday, extending its slide to a fifth straight session, after the central bank sharply weakened its official guidance rate as the dollar surged.

The onshore yuan fell 0.11 per cent to 6.6892 per dollar as of 7.18pm in Shanghai while the offshore yuan dropped 0.16 per cent to 6.6993.

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A version of this article appeared in the print edition of The Straits Times on July 07, 2016, with the headline 'China extends yuan forward deposit rule to foreign banks'. Print Edition | Subscribe