China asks large banks to stagger and adjust dollar purchases: sources

SHANGHAI, Sept 14 (Reuters) – China’s central bank has asked some of the country’s largest lenders to refrain from immediately squaring their currency positions in the market and to keep positions open for a time to ease pressure on the market. falls on the yuan. said two sources with knowledge of the matter.

As part of this informal “window guidance”, banks have been asked not to balance their positions in the interbank foreign exchange markets after any sale of US dollars to clients, until their spot foreign exchange position reaches a certain level. , sources said.

Most banks are allowed to maintain a net short or long foreign currency position in the dollar-yuan spot markets, within defined limits.

The move would effectively mean that some of the heavy dollar purchases by companies would be absorbed by banks and remain on their books for a while, thus partially reducing downward pressure on the yuan.

The directive emerged from a meeting the People’s Bank of China (PBOC) held with some commercial banks earlier this week, the sources said. Banks were also told that companies requiring purchases of $50 million or more will have to seek approval from the central bank, Reuters reported.

The Chinese yuan has lost more than 5% against the dollar so far this year, trading at 7.2735 per dollar on Thursday, becoming one of Asia’s worst-performing currencies for 2023.

The People’s Bank of China (PBOC) did not immediately respond to Reuters’ request for comment.

GOLDEN WEEK

The People’s Bank of China’s latest efforts to smooth currency moves come just ahead of China’s Golden Week holiday in early October, which traditionally sees a surge in overseas travel and demand for dollars. .

Sources who received the directive said banks were also asked to encourage their customers to postpone dollar purchases.

Widening yield differentials with other major economies, particularly the United States, and a faltering domestic economic recovery have added pressure on the yuan. Its steady decline has also led to an unbalanced market, as exporters retain their dollar profits in deposits rather than converting them into yuan or renminbi, as the local currency is known in China.

“The source of the renminbi’s weakness is very simple that interest rates in China are low, activity in China is slow, and therefore the rate of return on marginal capital invested in China is not as great as in elsewhere and therefore that impacts capital flows,” said Sid Mathur, head of macroeconomic strategy for Asia-Pacific and emerging markets research at BNP Paribas.

EXCEED

China’s foreign exchange self-regulatory body said on Monday it will resolutely defend the risks of the yuan going overboard and pledged to take measures where necessary to correct unilateral and pro-cyclical activities, according to a statement released by the People’s Bank of China.

In recent months, China has intensified its efforts to slow the pace of the yuan’s decline by setting persistently stronger-than-expected midpoints. Earlier this month, it announced that it would increase the supply of dollars by reducing the amount of foreign currency that banks must reserve.

Chinese authorities “are simply smoothing out the cycle. They want to avoid herd behavior. They want to avoid a scenario where the market feels like they might be losing control. And so they are simply using different administrative tools to smooth out the price action.” Mathur said. saying.

Sources told Reuters last month that China’s currency regulators asked some banks to reduce or postpone their purchases of US dollars to curb the depreciation of the yuan.

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