China’s Central Bank Urges Banks to Hold Open Foreign Exchange Positions
SHANGHAI, Sept 14 – In an effort to relieve downward pressure on the yuan, China’s central bank has instructed some of the country’s largest lenders to refrain from immediately squaring their foreign exchange positions in the market, according to two sources familiar with the matter.
As part of the informal “window guidance,” banks have been advised not to square their positions in the inter-bank foreign exchange markets following any U.S. dollar sales to clients until their spot foreign exchange position reaches a certain level, the sources said.
Most banks are permitted to maintain net short or long foreign currency positions in spot dollar-yuan markets within specific limits.
The move would mean that some of the heavy dollar purchases made by companies will be absorbed by banks and held on their books for a period of time, partially reducing the downward pressure on the weakening yuan.
The directive was issued during a meeting held earlier this week by the People’s Bank of China (PBOC) with a few commercial banks, according to the sources. Additionally, banks were informed that companies seeking to purchase $50 million or more would need to obtain approval from the central bank, as reported by Reuters.
China’s yuan has experienced a decline of over 5% against the U.S. dollar so far in 2023, trading at 7.2735 per dollar on Thursday. This depreciation has made it one of the worst-performing currencies in Asia this year.
The PBOC has yet to respond to Reuters’ request for comment on the matter.
GOLDEN WEEK
The recent efforts by the PBOC to stabilize currency movements come ahead of China’s golden week holidays in early October, which usually see a surge in overseas travel and demand for dollars.
The sources who received the directive stated that banks were also encouraged to advise their clients to postpone any dollar purchases.
Growing yield differentials with other major economies, particularly the United States, along with a sluggish domestic economic recovery, have contributed to the pressure on the yuan. The currency’s persistent decline has led to an imbalanced market, as exporters opt to retain their dollar earnings in deposits rather than converting them to yuan, or renminbi, as the local currency is known in China.
“The source of the weakness in renminbi is very simply that interest rates in China are low, that activity in China is slow, therefore the rate of return of marginal capital invested in China is not as great as elsewhere, and therefore that impacts capital flows,” explained Sid Mathur, head of Asia-Pacific macro strategy and emerging market research at BNP Paribas.
OVERSHOOT
China’s foreign exchange self-regulatory body announced on Monday its resolute commitment to warding off risks of the yuan overshooting and pledged to take corrective action as necessary to correct one-sided and pro-cyclical activities, according to a statement published by the PBOC.
In recent months, China has intensified its efforts to curb the pace of the yuan’s decline by setting midpoint fixings that are stronger than expected. Earlier this month, it announced plans to increase the supply of dollars by reducing the amount of foreign exchange that banks must set aside.
Chinese authorities are focused on smoothing out the currency cycle and avoiding herding behavior in the market. They are utilizing various administrative tools to achieve price stability, according to Mathur.
Sources previously informed Reuters that China’s currency regulators asked some banks to reduce or postpone their purchases of U.S. dollars in order to slow the depreciation of the yuan.
Reporting by Shanghai Newsroom
Editing by Shri Navaratnam
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