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China Imposes FX Reserve Requirement on Foreign Banks

China has moved to limit speculation
against the yuan by imposing reserve requirements on foreign banks trading in
the forward FX market.

In a note published on its website, the
China Foreign Exchange Trading System (CFETS) says it is introducing the
requirement “
in order to improve
the macro-prudential management” of the forward FX market. Previously local
banks had been subject to the rule, which was first
imposed last year
.

Under the reserve
requirement, which will be implemented on August 15, overseas participants will
be required to deposit 20% of the value of the previous month’s yuan contracts
undertaken for offshore clients in the local FX market. The reserve will be
held by CFETS and no interest will be paid. The calculation of the reserve
requirement will be calculated on the 15th day of each month, CFETS
says.

By imposing the
requirement, China is making it more expensive for offshore participants to
short the yuan in the offshore market and hedge the trade onshore. Yesterday
USD/CNY – the onshore market – hit a new six year high at 6.6947 and yuan weakness
continued, snce then the cross has eased back to 6.6840.
 

Colin_lambert@profit-loss.com

Twitter @lamboPnL

Twitter
@Profit_and_Loss

Colin Lambert

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