This illustration taken on January 30, 2023 shows US dollar and Chinese yuan banknotes.Reuters/Dado Ruvic/Illustration/File photo Obtaining license rights
SHANGHAI, Sept 14 (Reuters) – The People’s Bank of China has asked some major financial institutions to refrain from immediately holding foreign exchange positions in the market and keep them open for a while to ease downward pressure on the yuan. was requested to hold. This was revealed by two sources familiar with the matter.
As part of this informal “window guidance,” banks are asked not to square their positions in the interbank foreign exchange market until spot foreign exchange positions reach a certain level after selling US dollars to customers, sources said. It is said that
Most banks are permitted to hold net short or long foreign currency positions in the dollar-yuan spot market within established limits.
The move effectively means that some of the large dollar purchases by companies will be absorbed by banks and remain on their books for some time, thus partially relieving downward pressure on the renminbi. .
The directive was issued at a meeting held by the People’s Bank of China with several commercial banks earlier this week, sources said. Banks were also told that businesses requiring purchases of more than $50 million would need to seek approval from the central bank, Reuters reported.
China’s yuan has fallen more than 5% against the dollar since the beginning of the year and was trading at 7.2735 yuan to the dollar as of Thursday, making it one of Asia’s worst-performing currencies in 2023.
The People’s Bank of China (Central Bank) did not respond to a Reuters request for comment.
golden week
The People’s Bank of China’s latest efforts to smooth currency fluctuations come just ahead of China’s Golden Week holiday in early October, when international travel and dollar demand are traditionally expected to surge.
Sources familiar with the directive said banks were instructed to encourage customers to refrain from purchasing dollars.
The widening yield gap with other major economies, especially the United States, and the sluggish domestic economic recovery are putting pressure on the yuan. Its steady decline has also led to a skewed market as exporters keep their dollar profits in deposits rather than converting them into renminbi (renminbi, as China’s local currency is known).
“The cause of the weak renminbi is simply that interest rates in China are low and activity in China is slow, so the return on marginal capital invested in China is not as great as in other regions, which affects capital flows. ” said Sid Mercer, head of Asia Pacific macro strategy and emerging markets research at BNP Paribas.
overshoot
China’s foreign exchange self-regulatory body on Monday vowed to resolutely avoid the risk of renminbi overshoot and take necessary measures to correct unilateral and pro-cyclical activities, according to a statement released by the People’s Bank of China. He promised to take action if the situation arises.
China has stepped up efforts in recent months to slow the pace of the yuan’s decline by consistently setting a stronger-than-expected median price. Earlier this month, it announced it would increase the supply of dollars by lowering the amount of foreign currency banks must set aside.
Chinese authorities are “simply smoothing the cycle. We want to avoid herd behavior. We want to avoid a scenario where the market feels like it’s losing control. And we want to use other management tools to smooth out price movements.” “It’s just that,” Mathur said. He said.
Sources told Reuters last month that China’s currency regulator has asked some banks to reduce or postpone dollar purchases to slow the yuan’s decline.
Report by Shanghai Newsroom Edited by Shri Navaratnam
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