China makes new move to curb capital outflows and hold yuan stable, say sources

China is trying to limit the transfer of yuan outside the country, to restrict capital outflows and hold the exchange rate steady.
China is trying to limit the transfer of yuan outside the country, to restrict capital outflows and hold the exchange rate steady.PHOTO: REUTERS

SHANGHAI (REUTERS) - Offshore yuan clearing banks and related offshore participant banks have had their trading in bond repos and account finance suspended by the central bank, people with direct knowledge of the matter told Reuters.

That move would limit the transfer of funds outside of the country, restricting capital outflows and contributing to holding the exchange rate stable as China tries to hold the yuan flat in the run-up to the International Monetary Fund's decision on whether to include the currency in its reserve basket.

"We received window guidance from the central bank on Friday," a person at an offshore yuan clearing bank said. "We have already temporarily suspended trade in yuan account financing and bond repurchases with onshore banks."

Faxes and calls by Reuters to the People's Bank of China (PBOC) requesting comment were not immediately answered.

A trader at a Chinese commercial bank in Shanghai said the action "may have an impact on forward contracts trading and the spot price of onshore yuan, because the yuan supply in offshore market will decrease".

The move would mark an intensification of efforts to keep people from selling off the yuan, which has come under pressure as China has cut interest rates while the United States is preparing to raise them.

The efforts have included heavy intervention in onshore and offshore forex markets to prop up the yuan, traders say.

"I think this action runs contrary to recent forex market reforms, given that the central bank is trying to internationalise the yuan and boost demand for the currency," said a trader at a foreign commercial bank in Shanghai. "This action may aim at curbing the speculation in the currency, but it is a little bit confusing why the central bank would take this move now."

In September, China's foreign currency regulator started looking into corporate forex purchases. An official said foreign currency demand by some firms and individuals exceeded "the real and rational use" for the currency.

Chinese central bankers have struggled to put a floor under the exchange rate since a surprising devaluation of the official guidance rate in August, which made offshore and onshore markets shave nearly 3 per cent off the yuan's value.

Intervention to stave off panic forced the central bank to drain China's forex reserves at unprecedented rates, but the trend appeared to be halted in October, when the PBOC and commercial banks bought a net 12.9 billion yuan (S$2.88 billion) of foreign exchange.

The October purchases stemmed heavy sales in the previous three months that underlined capital outflows.