China central bank to tighten currrency forwards trading to curb speculation: Sources

China's central bank will tighten rules on trading of yuan forwards from next month.
China's central bank will tighten rules on trading of yuan forwards from next month.PHOTO: REUTERS

SHANGHAI (REUTERS) - China's central bank will tighten rules on trading of yuan forwards from next month, sources with direct knowledge of the matter told Reuters, in a move to curb speculation and rising volatility after a sharp sell-off in the currency.

The People's Bank of China (PBOC) has repeatedly intervened to stabilise the yuan since it shocked global markets by devaluing the currency on Aug. 11, sending shockwaves through financial markets and depressing emerging currencies.

The sources said the PBOC will require banks trading currency forwards to set aside reserves from Oct. 15. Banks will be required to keep the equivalent of 20 per cent of their clients' forex forwards positions in US dollar reserves to be held for a year at no interest, they added.

The PBOC did not immediately respond to requests for comment.

Some traders said policymakers were stepping up risk controls while others saw it as a step back for market reforms.

"Overall, the move is a strengthening of supervision and regulation of the yuan's derivative markets," said a trader at a major European bank in Shanghai. "With the yuan's trading expected to be more volatile in the future because of increased uncertainty of the Chinese economy, the PBOC is taking precautions."

But traders said the move also raises the cost of forwards business by locking up hard currency at a zero rate of return, and hampers the entering and exiting of forwards contracts.

"They were moving towards market-oriented reforms. This is 10 steps back," said a currency trader in Hong Kong.

The yuan's devaluation by nearly 2 per cent on Aug 11 rattled investor confidence and increased trading volatility - particularly in offshore markets.

Offshore yuan slid to 6.43 per US dollar on Tuesday (Sept 1), far weaker than the onshore spot rate of 6.37, as offshore investors priced in further depreciation.

The yuan weakened 2.6 per cent in August, its worst monthly performance on record, raising concerns it could provoke capital flight even as China's wider economy stumbles.

In a rare move, the central bank intervened in forwards market trading last Thursday to help stabilise expectations of the yuan's value in the future.

Beijing appears to have been surprised by the global reaction to its currency devaluation and the PBOC has tried to restore confidence through a mild public relations campaign explaining the reasoning behind its decision.