China asks big banks to stagger and adjust dollar purchases: Report
China’s central bank has reportedly issued a directive to some of the country’s largest lenders, urging them not to immediately square their foreign exchange positions in the market. Instead, the central bank has encouraged these banks to maintain open positions for a period to help alleviate downside pressure on the yuan, according to two sources with knowledge of the matter.
The decision to encourage banks to hold open positions in foreign exchange reflects an effort to manage the value of the Chinese yuan (renminbi) in the foreign exchange market. By doing so, the central bank aims to stabilize or prevent excessive depreciation of the currency.
Open positions in foreign exchange essentially mean that banks hold positions in foreign currencies without immediately converting them into yuan. This approach can help counteract speculative activities that might put pressure on the yuan’s exchange rate.
Currency management is a critical aspect of China’s economic policy, as exchange rate fluctuations can impact trade, investment, and the overall economic stability of the country. The central bank’s intervention in the foreign exchange market is a common strategy used to influence the yuan’s value and ensure it aligns with the government’s economic objectives.
Efforts to manage the yuan’s exchange rate can involve various tactics, including currency market interventions, adjustments to the official exchange rate, and guidance to financial institutions, as appears to be the case in this directive to refrain from immediately squaring foreign exchange positions.
Under the informal “window guidance” provided by China’s central bank, banks have received instructions not to square their positions in the inter-bank foreign exchange markets immediately after conducting U.S. dollar sales to clients. Instead, they are advised to maintain these positions until their spot foreign exchange position reaches a specific level, according to the sources.
This guidance suggests that the central bank is seeking to manage the timing of currency transactions conducted by banks to influence the overall supply and demand dynamics in the foreign exchange market. By asking banks to delay squaring their positions, the central bank aims to regulate the impact of these transactions on the yuan’s exchange rate, thereby contributing to currency stability.
Such measures are not uncommon in the realm of central bank interventions in currency markets. Central banks often employ a combination of formal and informal tools to manage exchange rates and ensure that they align with the country’s economic objectives.
In this case, the guidance reflects the central bank’s efforts to maintain control over the yuan’s value and prevent abrupt fluctuations that could disrupt trade and financial markets. Managing the timing of foreign exchange transactions can be a practical means of achieving these goals while allowing for flexibility in currency management.
Many banks are typically permitted to maintain a net short or long foreign currency position in the spot dollar-yuan markets, subject to specified limits and regulations.
The central bank’s directive to banks not to square their foreign exchange positions immediately after conducting U.S. dollar sales to clients effectively means that some of the substantial dollar purchases made by companies will be absorbed by the banks and remain on their books for a certain period. This strategy aims to partially alleviate the downward pressure on the depreciating yuan.
By allowing banks to hold these foreign currency positions temporarily, the central bank aims to manage the supply and demand dynamics in the foreign exchange market more effectively. This approach can help prevent abrupt or excessive depreciation of the yuan by absorbing some of the dollar inflows generated by companies’ foreign currency transactions.
In essence, the central bank’s directive to banks to hold open positions in foreign exchange serves as a means of stabilizing the yuan’s exchange rate and managing the impact of external factors, such as corporate dollar purchases, on the currency’s value. This approach aligns with the central bank’s broader objectives of maintaining currency stability and supporting its monetary policy goals.The directive regarding the management of foreign exchange positions came following a meeting held by the People’s Bank of China (PBOC) with a select group of commercial banks earlier in the week, as reported by the sources.
In addition to the guidance on not squaring positions immediately after dollar sales, banks were also informed that companies wishing to purchase $50 million or more in foreign currency will be required to obtain approval from the central bank. This measure is designed to further regulate large-scale foreign currency transactions and ensure they align with the central bank’s objectives.
China’s yuan has experienced a depreciation of more than 5% against the U.S. dollar so far in the year, with a trading rate of 7.2735 yuan per dollar as of the time the information was reported. This depreciation has positioned the yuan as one of the underperforming currencies in Asia for the year 2023.
The People’s Bank of China has not provided an immediate response to Reuters’ request for comment, and its actions and interventions in the foreign exchange market are often closely monitored by market participants and analysts for their impact on the yuan’s exchange rate and broader economic implications.In addition to the directive to manage foreign exchange positions, the sources familiar with the matter stated that banks were instructed to encourage their clients to postpone their dollar purchases.
Several factors have contributed to the pressure on the yuan, including widening yield differentials between China and other major economies, particularly the United States. Additionally, concerns have arisen due to a faltering domestic economic recovery in China. The steady depreciation of the yuan has led to a situation where exporters are holding onto their dollar earnings in deposits rather than converting them into yuan (renminbi), which has contributed to a lopsided market.
Sid Mathur, the head of Asia-Pacific macro strategy and emerging market research at BNP Paribas, pointed out that the primary driver of the yuan’s weakness is the combination of low interest rates in China, sluggish economic activity, and the relative attractiveness of capital returns in comparison to other countries. These factors impact capital flows and influence the exchange rate dynamics of the yuan.
The management of currency and capital flows is a critical aspect of China’s economic policy, and the government often takes measures to stabilize the yuan and prevent excessive depreciation or appreciation. These efforts are designed to support economic stability, trade competitiveness, and overall monetary policy objectives.
China’s foreign exchange self-regulatory body has expressed its commitment to preventing the yuan from overshooting and has pledged to take action as necessary to correct any one-sided and pro-cyclical activities, according to a statement published by the People’s Bank of China (PBOC).
In recent months, China has taken measures to slow the pace of depreciation in the yuan. This has included setting midpoint fixings that are consistently stronger than market expectations. Additionally, the authorities have announced plans to increase the supply of U.S. dollars by reducing the foreign exchange reserves that banks are required to hold.
The objective behind these measures is to ensure that the currency’s movements are more stable and less prone to extreme fluctuations. Chinese authorities are aiming to avoid situations where the market perceives a loss of control or engages in herding behavior.
Sid Mathur, Head of Asia-Pacific Macro Strategy and Emerging Market Research at BNP Paribas, suggests that the Chinese authorities are using administrative tools to smooth the price action and prevent abrupt or unpredictable movements in the currency markets.
These actions are in line with China’s approach to maintaining stability in its financial markets and managing the exchange rate in a way that aligns with its broader economic objectives. Currency management plays a crucial role in China’s economic policy, given its impact on trade, capital flows, and overall monetary policy effectiveness.
Reuters reported last month that sources indicated China’s currency regulators had requested certain banks to reduce or delay their purchases of U.S. dollars as part of efforts to slow the depreciation of the yuan. This approach is consistent with China’s strategy to manage the exchange rate and prevent rapid declines in the value of its currency.
By encouraging banks to limit their dollar purchases, the authorities seek to moderate the downward pressure on the yuan. Such measures can help achieve a more controlled and stable currency environment, aligning with the government’s economic and monetary policy goals.
These actions underscore the active role that Chinese authorities play in managing the currency market to maintain stability and ensure that exchange rate movements do not disrupt the broader economy or financial markets.
Many banks are typically permitted to maintain a net short or long foreign currency position in the spot dollar-yuan markets, subject to specified limits and regulations.
The central bank’s directive to banks not to square their foreign exchange positions immediately after conducting U.S. dollar sales to clients effectively means that some of the substantial dollar purchases made by companies will be absorbed by the banks and remain on their books for a certain period. This strategy aims to partially alleviate the downward pressure on the depreciating yuan.
By allowing banks to hold these foreign currency positions temporarily, the central bank aims to manage the supply and demand dynamics in the foreign exchange market more effectively. This approach can help prevent abrupt or excessive depreciation of the yuan by absorbing some of the dollar inflows generated by companies’ foreign currency transactions.
In essence, the central bank’s directive to banks to hold open positions in foreign exchange serves as a means of stabilizing the yuan’s exchange rate and managing the impact of external factors, such as corporate dollar purchases, on the currency’s value. This approach aligns with the central bank’s broader objectives of maintaining currency stability and supporting its monetary policy goals.
The directive regarding the management of foreign exchange positions came following a meeting held by the People’s Bank of China (PBOC) with a select group of commercial banks earlier in the week, as reported by the sources.
In addition to the guidance on not squaring positions immediately after dollar sales, banks were also informed that companies wishing to purchase $50 million or more in foreign currency will be required to obtain approval from the central bank. This measure is designed to further regulate large-scale foreign currency transactions and ensure they align with the central bank’s objectives.
China’s yuan has experienced a depreciation of more than 5% against the U.S. dollar so far in the year, with a trading rate of 7.2735 yuan per dollar as of the time the information was reported. This depreciation has positioned the yuan as one of the underperforming currencies in Asia for the year 2023.
The People’s Bank of China has not provided an immediate response to Reuters’ request for comment, and its actions and interventions in the foreign exchange market are often closely monitored by market participants and analysts for their impact on the yuan’s exchange rate and broader economic implications.
In addition to the directive to manage foreign exchange positions, the sources familiar with the matter stated that banks were instructed to encourage their clients to postpone their dollar purchases.
Several factors have contributed to the pressure on the yuan, including widening yield differentials between China and other major economies, particularly the United States. Additionally, concerns have arisen due to a faltering domestic economic recovery in China. The steady depreciation of the yuan has led to a situation where exporters are holding onto their dollar earnings in deposits rather than converting them into yuan (renminbi), which has contributed to a lopsided market.
Sid Mathur, the head of Asia-Pacific macro strategy and emerging market research at BNP Paribas, pointed out that the primary driver of the yuan’s weakness is the combination of low interest rates in China, sluggish economic activity, and the relative attractiveness of capital returns in comparison to other countries. These factors impact capital flows and influence the exchange rate dynamics of the yuan.
The management of currency and capital flows is a critical aspect of China’s economic policy, and the government often takes measures to stabilize the yuan and prevent excessive depreciation or appreciation. These efforts are designed to support economic stability, trade competitiveness, and overall monetary policy objectives.China’s foreign exchange self-regulatory body has expressed its commitment to preventing the yuan from overshooting and has pledged to take action as necessary to correct any one-sided and pro-cyclical activities, according to a statement published by the People’s Bank of China (PBOC).
In recent months, China has taken measures to slow the pace of depreciation in the yuan. This has included setting midpoint fixings that are consistently stronger than market expectations. Additionally, the authorities have announced plans to increase the supply of U.S. dollars by reducing the foreign exchange reserves that banks are required to hold.
The objective behind these measures is to ensure that the currency’s movements are more stable and less prone to extreme fluctuations. Chinese authorities are aiming to avoid situations where the market perceives a loss of control or engages in herding behavior.
Sid Mathur, Head of Asia-Pacific Macro Strategy and Emerging Market Research at BNP Paribas, suggests that the Chinese authorities are using administrative tools to smooth the price action and prevent abrupt or unpredictable movements in the currency markets.
These actions are in line with China’s approach to maintaining stability in its financial markets and managing the exchange rate in a way that aligns with its broader economic objectives. Currency management plays a crucial role in China’s economic policy, given its impact on trade, capital flows, and overall monetary policy effectiveness.
Reuters reported last month that sources indicated China’s currency regulators had requested certain banks to reduce or delay their purchases of U.S. dollars as part of efforts to slow the depreciation of the yuan. This approach is consistent with China’s strategy to manage the exchange rate and prevent rapid declines in the value of its currency.
By encouraging banks to limit their dollar purchases, the authorities seek to moderate the downward pressure on the yuan. Such measures can help achieve a more controlled and stable currency environment, aligning with the government’s economic and monetary policy goals.
These actions underscore the active role that Chinese authorities play in managing the currency market to maintain stability and ensure that exchange rate movements do not disrupt the broader economy or financial markets.
In addition to the directive to manage foreign exchange positions, the sources familiar with the matter stated that banks were instructed to encourage their clients to postpone their dollar purchases.
Several factors have contributed to the pressure on the yuan, including widening yield differentials between China and other major economies, particularly the United States. Additionally, concerns have arisen due to a faltering domestic economic recovery in China. The steady depreciation of the yuan has led to a situation where exporters are holding onto their dollar earnings in deposits rather than converting them into yuan (renminbi), which has contributed to a lopsided market.
Sid Mathur, the head of Asia-Pacific macro strategy and emerging market research at BNP Paribas, pointed out that the primary driver of the yuan’s weakness is the combination of low interest rates in China, sluggish economic activity, and the relative attractiveness of capital returns in comparison to other countries. These factors impact capital flows and influence the exchange rate dynamics of the yuan.
The management of currency and capital flows is a critical aspect of China’s economic policy, and the government often takes measures to stabilize the yuan and prevent excessive depreciation or appreciation. These efforts are designed to support economic stability, trade competitiveness, and overall monetary policy objectives.
China’s foreign exchange self-regulatory body has expressed its commitment to preventing the yuan from overshooting and has pledged to take action as necessary to correct any one-sided and pro-cyclical activities, according to a statement published by the People’s Bank of China (PBOC).
In recent months, China has taken measures to slow the pace of depreciation in the yuan. This has included setting midpoint fixings that are consistently stronger than market expectations. Additionally, the authorities have announced plans to increase the supply of U.S. dollars by reducing the foreign exchange reserves that banks are required to hold.
The objective behind these measures is to ensure that the currency’s movements are more stable and less prone to extreme fluctuations. Chinese authorities are aiming to avoid situations where the market perceives a loss of control or engages in herding behavior.
Sid Mathur, Head of Asia-Pacific Macro Strategy and Emerging Market Research at BNP Paribas, suggests that the Chinese authorities are using administrative tools to smooth the price action and prevent abrupt or unpredictable movements in the currency markets.
These actions are in line with China’s approach to maintaining stability in its financial markets and managing the exchange rate in a way that aligns with its broader economic objectives. Currency management plays a crucial role in China’s economic policy, given its impact on trade, capital flows, and overall monetary policy effectiveness.
Reuters reported last month that sources indicated China’s currency regulators had requested certain banks to reduce or delay their purchases of U.S. dollars as part of efforts to slow the depreciation of the yuan. This approach is consistent with China’s strategy to manage the exchange rate and prevent rapid declines in the value of its currency.
By encouraging banks to limit their dollar purchases, the authorities seek to moderate the downward pressure on the yuan. Such measures can help achieve a more controlled and stable currency environment, aligning with the government’s economic and monetary policy goals.
These actions underscore the active role that Chinese authorities play in managing the currency market to maintain stability and ensure that exchange rate movements do not disrupt the broader economy or financial markets.
