Sources: China asks major banks to stagger and adjust their dollar purchases

US dollar and Chinese yuan banknotes are shown in this illustration taken on January 30, 2023. REUTERS/Dado Rovik/Photo Illustration/File Obtaining licensing rights

SHANGHAI (Reuters) – China’s central bank has asked some of the country’s largest lenders to refrain from settling their foreign exchange positions in the market immediately, and to hold open positions for a period of time in order to ease negative pressure on the yuan. Two sources familiar with the matter said.

As part of this informal “window directive”, banks have been asked not to settle their positions in interbank foreign exchange markets after any US dollar sales to customers, until their spot foreign exchange position reaches a certain level, the sources said.

Most banks are permitted to operate a net short or long position in foreign currency in the dollar and yuan spot markets, within specified limits.

The move effectively means that some large corporate dollar purchases will be absorbed by banks and remain on their books for a while, partly reducing downward pressure on the declining yuan.

The directive came after a meeting held by the People’s Bank of China with a few commercial banks earlier this week, the sources said. Banks have also been told that companies requesting purchases of $50 million or more will need to obtain central bank approval, Reuters reported.

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

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

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Golden week

The People’s Bank of China’s latest efforts to smooth currency movements come ahead of China’s Golden Week holiday in early October, which traditionally sees a boom in overseas travel and demand for the dollar.

The sources that received the directive said that banks were also told to encourage their customers to stop buying dollars.

Widening yield spreads with other major economies, especially the United States, and a faltering economic recovery have increased pressure on the yuan. Its continued decline has also led to an unbalanced market, with exporters keeping 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 simply that interest rates in China are low, activity in China is slow, and so the rate of return on marginal capital invested in China is not as great as elsewhere, and so that affects capital flows,” Syed said. Mathur, Head of Macro Strategy, Asia Pacific and Emerging Markets Research at BNP Paribas.

Transgression

China’s Foreign Exchange Self-Regulatory Authority said on Monday that it will firmly address the risks of yuan overvaluation and pledged to take measures when needed to correct unilateral and procyclical activities, according to a statement published 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 consistently setting a stronger-than-expected midpoint. Earlier this month, it announced that it would increase the supply of dollars by reducing the amount of foreign exchange that banks must set aside.

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The Chinese authorities “are simply facilitating the cycle.” She wants to avoid herd behavior. You want to avoid a scenario where the market feels it may lose control. So it just uses different administrative tools to facilitate price movement,” Mathur said.

Sources told Reuters last month that China’s currency regulators had asked some banks to reduce or postpone their purchases of US dollars in order to slow the decline in the value of the yuan.

(Reporting by Shanghai newsroom; Editing by Shri Navaratnam)

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