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China central bank relaxes yuan hedging rules as currency strengthens, capital outflows ease

Reuters  |  BEIJING 

(Reuters) - China's central on Monday scrapped two measures that were put in place to support the yuan when it was under significant selling pressure, suggesting is anxious to quash one way bets on the yuan as outflows ease and exporters face strain.

The move comes as the yuan bounced sharply this year to hit a near two-year peak on the dollar last week, giving authorities the confidence to relax their grip on a currency that had stumbled badly in 2016 and raised risks to economic stability.

With China's economy humming along at a solid pace and putting to bed concerns of a sharper slowdown, the central is likely to pursue a more neutral yuan rate with the potential for increased two-way volatility, analysts said in the wake of the rules changes.

"The central seems to convey the idea that conducts a dynamic policy making process," Commerzbank analysts Hao Zhou and Lutz Karpowitz wrote in a note.

"Against this backdrop, the capital control policies could be eased somewhat if there is no undesired market turbulence following the removal of the reserve requirements."

The People's of has scrapped reserve requirements for financial institutions settling foreign exchange forward yuan positions, it said in comments emailed to on Monday morning. The has also stopped requiring foreign banks to put aside reserves for offshore yuan deposits in Both changes are effective immediately.

Reuters, citing sources with direct knowledge of the matter, had reported these changes earlier.

The PBOC's statement said the changes took into consideration current market conditions, adding that the yuan strength against the dollar this year reflected an improving Chinese economy.

LOWER APPETITE FOR APPRECIATION

Markets were quick to react, with the yuan losing ground despite the setting a higher midpoint of 6.4997 per dollar, strengthening it beyond the key psychological 6.5 level for the first time since May 2016.

The offshore and onshore yuan were both trading weaker than the 6.5 level on Monday.

Still, around 6.52 to the dollar the onshore yuan was not too far off a 21-month high at 6.4478 set on Friday, underpinned by capital curbs, broad dollar weakness and the PBOC's tighter control of the midpoint.

At the official local close on Monday, the onshore spot yuan was up around 6.5 percent so far this year, which is about the same losses it suffered in 2016.

Analysts at Goldman Sachs said the central bank's recent policy signals "seem to point to reduced comfort with the ongoing pace of appreciation".

They highlighted a shift in the "counter-cyclical" factor in yuan fixings that had seen it turn more reactive to market appreciation pressures, potentially pointing to a reduced propensity to accommodate much more strength in the yuan.

The analysts were referring to the mysterious "counter-cyclical" factor that the added to their calculations of the yuan's daily reference point to curb price swings in the Chinese currency.

Sources have told that Chinese policymakers are beginning to worry about the strength of the yuan as exporters come under strain, risking a hit to the economy ahead of an important Communist Party gathering in the autumn.

All the same, intervening to cap it could expose to accusations of currency manipulation by U.S President Donald Trump.

"One interpretation is that the pace of CNY appreciation has taken the PBoC, as well as the market by surprise," said Iris Pang, economist at ING, in a note to clients.

"We believe that CNY appreciation will continue, but at a slower pace from now on."

(Reporting Elias Glenn and Winni Zhou; Editing by Shri Navaratnam)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Mon, September 11 2017. 15:11 IST
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