China increases banks’ foreign exchange requirements to bring the yuan under control
* Foreign exchange reserve requirement ratios noted for financial institutions
* The yuan retreats after hitting a three-year high against the dollar
* Fixed for the strongest monthly gain since August
* Former forex official joins chorus warning of yuan gains (overhauls with foreign exchange reserve requirements)
SHANGHAI, May 31 (Reuters) – China’s central bank has ordered financial institutions to keep more foreign currency in reserve, a move that analysts say could help temper the yuan’s rally after the currency peaked on Monday three years against the dollar. .
The People’s Bank of China (PBOC) has said it will increase the foreign exchange reserve requirement ratio for financial institutions to 7% from 5%, starting June 15. This increase will make it more expensive for banks to hold dollars.
Banks in China have about $ 1 trillion in foreign currency deposits, some of which are export earnings and unconverted investment flows. Analysts said the hike would force banks to freeze more of those dollars, slowing the pace of the yuan’s appreciation by deterring longer-term dollar inflows.
“The aim is to tighten liquidity in foreign currencies, to raise interest rates in foreign currencies, in order to ease the pressure on the appreciation of the yuan,” said Shuang Ding, head of economic research on Greater China at Standard Chartered.
In response to questions, the PBOC referred Reuters to Guan Tao, a former senior official with China’s foreign exchange regulator.
Guan said that the PBOC’s use of the foreign exchange reserve requirement ratio, a tool that it has used little in the past, “shows that the PBOC still has many tools in its toolbox and that it has a great freedom of choice. In the future, if speculative trading appears in the forex market, it has a steady supply of macro-prudential tools. “
The announcement came after the yuan hit a three-year high against the dollar, and follows a string of warnings from Chinese authorities against speculative bets on the currency.
Guan joined many current and former officials on Monday warning against one-way bets on the yuan, which saw a two-month rise against the dollar. In a commentary published in the China Securities Official Journal, he warned of herding behavior that could harm market order and weigh on Chinese exporters.
Guan’s comments echoed those of a former central bank official, who said over the weekend that the yuan’s rise is unsustainable, and follows a warning from the Financial News, backed by the central bank. Regulators said last week they would crack down on foreign exchange manipulation, while leaving monetary policy unchanged.
A robust economic recovery and capital inflows put the yuan on track to record its biggest monthly gain against the dollar since August, with traders interpreting the PBOC’s daily midpoint fixings as indicating implied approval of a strong yuan.
On Monday, it took the yuan midpoint to its highest level since May 17, 2018. The spot yuan can trade at 2% either side of the daily fixing.
The firmer fixation also pushed the trade-weighted yuan basket index to 98.22, its highest since March 29, 2016. Market participants widely viewed the 98 mark as the basket cap because levels above this level are seen as a loss of competitive advantage. for China against its trading partners.
The spot yuan ended its domestic session at 6.3607 per dollar, its strongest close since May 15, 2018.
The offshore yuan strengthened to a high of 6.3526 to the dollar, also a three-year high, but weakened after the announcement of reserve requirements. It last traded at 6.3700.
The chief trader of a foreign bank in Shanghai said the yuan could face resistance as foreign companies buy dollars to make upcoming dividend payments.
“Some had bought dollars in the middle of the month, but those flows are not over yet,” he said.
But few people expect a significant change in the structural factors driving the yuan’s rise, including strong inflows as the economy recovers. Chinese factory activity continued to expand in May, despite soaring commodity prices that weighed on small businesses and export-oriented businesses.
Last week, increased foreign interest led to record inflows of Chinese A-shares through the Stock Connect program linking the mainland to Hong Kong.
The main Chinese stock indexes slipped on Monday, but posted their best monthly gain in six months. Flows to Chinese bonds also held up.
Iris Pang, chief economist for China at ING in Hong Kong, said in a note that yuan uncertainty presents a headache for companies, but the PBOC’s warnings on volatility should not be ignored .
“We believe the PBOC is experimenting with the volatility the market can handle and how the behavior of market participants can move the yuan,” Pang told Reuters.
Reporting by Winni Zhou, Samuel Shen and Andrew Galbraith in Shanghai; Additional reporting by Rong Ma in Beijing and Vidya Ranganathan and Tom Westbrook in Singapore; Editing by Jacqueline Wong
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